Bank Negara Malaysia keeps Overnight Policy Rate on hold, strong hints at rate cut in future

The Malaysian central bank kept policy unchanged today, as expected. The Overnight Policy Rate was kept the same at 3.25 percent. However, the BNM’s Monetary Policy Statement introduced working that strongly implies that the central bank might cut its rate during its next meeting.

BNM has in the past given solid hints through their MPS regarding pending changes to monetary policy. Today’s statement is seen as an evident hint to the market that they are planning to cut the OPR, and it could be as early as the next meeting in May.

The main body of the statement made clear that domestic and external conditions were not as favourable compared to their last meeting. While the BNM expects Malaysian economic growth to be sustained in 2019, they forecast inflation remaining low because of policy measures.

The BNM, in its statement, said that “At the current level of the OPR, the degree of monetary accommodativeness is consistent with the intended policy stance. Recognising that there are downside risks in the economic and financial environment, the MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation”.

The inclusion of the strong wording regarding recognizing downside risks is quite considerable, noted ANZ in a research report. This was the wording that was used during the May 2016 MPS, after which they lowered the OPR by 25 basis points at their next meeting.

The introduction of the wording into today’s statement is an evident signal that the BNM intends to ease policy. The fourth quarter GDP growth might have accelerated, but it is difficult to see private consumption sustaining its recent rate. Business and consumer sentiment has headed down, the external environment is not supportive and there is not much support coming from fiscal policy given the need to repair the fiscal position.

“A rate cut, which would unwind last year’s rate hike, could help provide some offset to the headwinds facing the economy. With the US Federal Reserve in pause mode, this provides BNM with a window to ease without causing financial market volatility”, stated ANZ.