KUALA LUMPUR: A further 25 basis points cut, at least, in Bank Negara Malaysia's key Overnight Policy Rate (OPR) interest rate is imminent although analysts are mixed whether the cut will happen early this week.
JP Morgan expects a 25bp policy easing at the central bank's Monetary Policy Committee (MPC) meeting on Tuesday.
But the American investment bank said there was some risk that Bank Negara would adopt a wait-and-see approach.
"According to our Taylor rule-model, a further 25bp cut, bringing the policy rate to 1.75 per cent, remains in the pipeline.
"Our baseline forecast pencils in a 25bp policy easing at next week's MPC meeting though we are cognizant that there is some risk that Bank Negara could adopt a wait-and-see approach towards the evolution of economic activity in the coming months before taking further policy action following the 100bp policy easing year-to-date," JP Morgan said.
FXTM said markets were rather divided on their expectations for Bank Negara's July 7 policy decision, with forecasts ranging from the OPR being left unchanged, to a cut as deep as 50 basis points.
The uncertainty could lead to some volatility in the ringgit as markets adjust their monetary policy outlooks in the wake of Bank Negara's official decision.
"Malaysia's May industrial production print is unlikely to have a major say on the ringgit's performance when the data is released on July 10," FXTM said.
FXTM said the June Markit manufacturing Purchasing Managers' Index's return to expansion, while also registering its highest reading since September 2018, was a heartening sign of Malaysia's economic recovery, with such prospects bolstered by the stimulus measures in place.
Malaysia's larger-than-expected declines for May's export and imports had resulted in a RM10.4 billion trade balance surplus, which was twice the amount markets forecasted, the firm added.
JP Morgan said Malaysia's gradual unwinding of the containment measures had hinted at some normalisation of economic activity in the second half of the year.
Despite this, the country's gross domestic product growth will likely continue to contract in over-year-ago terms for the remaining part of the year.
The firm, however, expects underlying momentum to rebound in the second half, from an average pace of -12.5 per cent quarter-on-quarter in the first half of 2020 to 5.75 per cent q-o-q in the second half, as the economy moved toward the Recovery MCO (RMCO) phase in early June.
"That said, much of the improvement hinges on the recovery in global demand, which posed a major drag on net exports in the first quarter of 2020," it added.
Malaysia's May trade balance widened to US$2.4 billion, following the deficit in April, said JPM Morgan.
It added that in seasonally adjusted (sa) terms, the trade balance had widened to US$3.0 billion.
The trade balance flipped back into a surplus in May due to a broad-based slowdown in imports, down 24 per cent month-on-month sa, while headline exports ticked up 1.2 per cent month-on-month, sa.