KUALA LUMPUR: Bank Negara Malaysia and other Asian central banks will likely turn to their monetary policy tool to stimulate economic growth in the face of rising downside risks from Brexit.
The global economy could likely backpedal with a Brexit, forcing policymakers to respond to growth shocks amid rising pressures on currencies.
In the event Brexit results in
a global growth slowdown, export-oriented economies with limited fiscal policy space will be most exposed.
Most research houses have recognised the impact of the surprise move by the United Kingdom to leave the European single market after 43 years of membership as indirect.
“We believe a Brexit will result in a negative demand shock and mildly positive US dollar shock,” said Malayan Banking Bhd (Maybank).
Central banks are likely to respond with an easy monetary policy that will smooth excess volatility, ensure ample liquidity and bias by some towards policy easing.
The ringgit would be among the Asian currencies that would face downside pressure, it warned.
“We see a stronger likelihood for Bank Negara to cut the Overnight Policy Rate and/or Statutory Reserve Requirement (SRR) and the timeline of the cut may be brought forward, possibly as early as next month.”
AmBank Research, which has lowered its gross domestic product outlook to four per cent from 4.2 per cent, has now factored a 25 basis points rate cut by Bank Negara to three per cent, plus one to three cuts in the SRR, which now stands at 3.5 per cent. The next monetary policy committee meeting is on July 13.
Standard Chartered Bank also holds a dovish view on monetary policies across Asia, expecting to see more easing from China, South Korea, Japan, Australia and New Zealand.
“Brexit also reinforces our view that Bank Negara may have to cut policy rates in the second half to support slowing growth,” it said.
Last Thursday, a UK referendum decided that the world’s fifth-largest economy should quit the European Union, which resulted in financial markets across the world tumbling.
AmBank Research has priced in a 45 per cent chance for global growth to slow to one per cent, adding that the key worry now was that the domino effect on the global economy would accelerate.
While the main channel through which Brexit could impact Asia would be via trade, Credit Suisse also warned of a risk that it would trigger a slowdown in global growth via a deterioration of business sentiment and financial market stress.
“We think Asian economies by and large will use monetary policy easing as a first line of defence to support growth.”
Credit Suisse said the likely shift in the United States Federal Reserve expectations should also provide central banks with room to act. Export-oriented economies with limited policy space would be more vulnerable, and they included Hong Kong, Malaysia and Vietnam.
Credit Suisse said the US dollar was expected to rally further against European currencies and this would likely push the dollar-yuan pair higher with knock-on effects on other Asian exchange rates.
Maybank said a rate cut would also be positive for bond outlook and could mitigate some of the negativity surrounding the ringgit.