18 January 2021, Monday | 12:06am

Another OPR cut in July likely, says DBS Group


KUALA LUMPUR (May 19): DBS Group Research predicts that another cut in the overnight policy rate (OPR) by Bank Negara Malaysia (BNM) could be on the cards in July, which would make it the fourth cut this year.

BNM has cut interest rates three times this year, amounting to 100 basis points (bps), with the most recent cut (50bps) on May 5. It had earlier cut the OPR by 25bps in January and by another 25bps in March. The current OPR rate stands at 2%.

“While our previous view is that the central bank will keep the OPR at 2% for the rest of the year, present inflation dynamics is suggesting otherwise,” DBS economist Irvin Seah wrote in a strategy report today.

Seah said inflation dipped to 0.2% year-on-year in March and could linger around negative 0.6% in the coming months on the back of the slew of cost reduction measures introduced by the government, a lack of demand impetus and low energy prices.

He added that disinflationary pressure is building up and the negative output gap is widening, which could tip full year inflation into negative level.

“We now expect headline inflation to average -0.4% for the full year, down from our previous forecast of zero. With the projected inflation dynamics in the coming months, real policy rate could be pushed back up to about 2.5% level, effectively negating the effects of the recent policy cut by the central bank,” said Seah.

Regardless, he notes that the next policy move by BNM will be data dependent.

“Should high frequency data, especially inflation figure, surprise on the downside in the coming months, another downward adjustment in the policy rate cannot be discounted.

"Another 25bps cut by BNM could be on the cards in July to better align the risks in both inflation and growth,” he said.

On Malaysia’s economic growth ahead, Seah said the second quarter gross domestic product (GDP) growth is now expected to dip below -2.5% before a marginal improvement towards the end of the year.

“Despite the first quarter GDP growth coming in close to our expectations, there are downside risks to our annual growth forecast due to the extension of the movement control order (MCO) till June 9, and a potentially weaker recovery ahead,” said Seah, adding that headline GDP growth will remain stuck in negative territory for the rest of the year.

With the negative impact of the MCO extension on domestic consumption, employment and investment activities, as well as the grimmer global outlook at present, DBS has lowered its full year GDP growth forecast to -1.6%, from -0.5% previously.

Source: The Edge Markets


No votes yet