Further cut in OPR this year not ruled out

PETALING JAYA: Bank Negara Malaysia’s (BNM) surprise move to cut the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3% yesterday signals worsening global economic conditions, which economists opine may lead to another reduction this year.
The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25% and 2.75% respectively, the central bank said in a statement after its Monetary Policy Committee meeting.
Affin Hwang Capital chief economist Alan Tan said if the economic growth momentum continues to weaken or if the external environment deteriorates on negative impact from Brexit and possibly China slowing down, there is a possibility of another 25bps cut in the second half of this year (2H16).
“The risks are mainly from the external side and the uncertainty in the global environment will put downward pressure on Malaysia’s growth prospect, especially in 2H16. BNM has a dual mandate on ensuring economic growth and inflationary pressure (financial stability). With the cut in OPR, the focus has been shifted to economic growth,” Tan told SunBiz.
He said the cut in OPR is expected to help the property sector and boost consumer spending, but also put downward pressure on the ringgit if the US Federal Reserve decides to increase interest rates at its September meeting.
MIDF Research expects another 25bps cut in the OPR in September, in line with its expectation of an overall 50bps cut in the second half of the year.
“The weak external factor has been the main reason for the rate cut. However, we opine that the weak external factor alone does not warrant a rate cut, but rather the possibility that the weak global demand will eventually affect domestic income, employment and investment level,” it said.
OCBC Bank economist Wellian Wiranto said Bank Negara, barely two months after painting a sanguine picture on growth outlook, surprised the market yesterday by cutting the OPR, ostensibly on growth concerns, prompted by post-Brexit repercussions that would subject global markets to greater volatility and Malaysia’s economy to greater downside risks.
“There is also the sense that global rates would be low for longer, which gives BNM the manoeuvre space to begin with. Looking ahead, if it deems that both the need to act and the space to do so are present, it will move again,” said Wellian.
He said given the relatively dark tone of BNM’s statement, "the chance of a further rate cut is inescapably there".
“However, on balance, we believe that it would adopt a wait-and-see attitude in the coming meeting on Sept 7, to gauge whether the hit to the global economy is really as bad as it now thinks. If things do turn out to be as unfavourable as it may fear, it may cut again in the following meeting on Nov 23, especially if the third quarter gross domestic product number out on Nov 11 proves to be subpar,” said Wellian.
On whether banks will revise their lending rates due to the OPR cut, a banking analyst said this depends on what banks are basing their benchmark cost of funds on.
“Most of them base it on KLibor (Kuala Lumpur Interbank Offered Rate), which has already been dropping,” said the analyst, adding that a 25bps cut is not expected to have a material impact on the banking sector.
Bank Negara has maintained the OPR at 3.25% for two years. It last revised the benchmark rate on July 10, 2014, raising it by 25bps to 3.25%