Bank Negara Malaysia (BNM) is expected to make one final 25 basis point (bps) cut in the Overnight Policy Rate (OPR) as early as in the central bank’s next Monetary Policy Committee (MPC) meeting on Sept 10, 2020 in anticipation of an arduous economic recovery path ahead, DBS Group said today.

DBS senior economist Irvin Seah and strategist Duncan Tan wrote in a note that there is room for further monetary easing to support economic growth in the coming months.

“Onshore IRS (interest rate swap) markets are pricing ~70-80% chance for one last BNM rate cut (25bps) of this easing cycle, either to occur at the Sept 10 or Nov 3 meeting. This would mean BNM hitting our estimate of the policy lower bound of 1.5%, by the end of the year.

“Note (that) BNM had cut the OPR by a total of 125bps year-to-date to 1.75% to complement the equally robust fiscal measures aimed at buffering the economy from the impact of the pandemic. But with growth surprising on the downside and an arduous recovery path ahead notwithstanding, there is room for further monetary easing to support growth in the coming months.

“As such, we now expect one final 25bps cut by BNM as early as in the forthcoming September meeting, to better align the risks in both inflation and growth,” Seah and Tan said.

According to them, Malaysia’s real gross domestic product (GDP) growth contracted by a sharp 17.1% in the second quarter of 2020 (2Q20) from a year earlier. In quarterly terms, they said 2Q20 GDP dropped 51.3% from 1Q20.

They said beyond the direct impact of the Covid-19 pandemic on the health front and strong external headwinds resulting from a slump in global demand, the implementation of Malaysia’s Movement Control Order (MCO) to curb the spread of the pandemic is the main factor behind the 2Q20 growth downturn.

“The downside surprise in 2Q GDP growth has significantly lowered the growth trajectory for the full year. The anticipated turnaround in the third and fourth quarter may not be enough to offset the sharp second quarter decline.

“Headline GDP growth will remain stuck in negative territory for the rest of the year. We have thus lowered our 2020 full year GDP growth forecast to -5.5%, which is at the lower end of the official forecast range of -5.5% to – 3.5%, and the lowest since the Asian Financial Crisis, (during) which the economy contracted by 7.4% in 1998. However, with the low base this year and the global recovery that is currently underway, albeit slowly, we see (Malaysia’s) GDP growth rebounding to 6.0% in 2021,” they said.

Malaysia’s disinflationary pressure is seen building up and the nation’s negative output gap is seen widening amid recessionary economic conditions. Seah and Tan said today even though inflation, as measured by the consumer price index (CPI), has recovered to -1.3% in July, the headline number is expected to remain stuck in negative level for the rest of 2020.

Full year (2020) inflation is projected to average -1.1% before rebounding to 1.8% in 2021, they said.

Source: EdgeProp.my