KUALA LUMPUR: BANK Negara Malaysia is expected to keep the Overnight Policy Rate (OPR) unchanged at 3.25 per cent but analysts say the recent Brexit vote (Britain leaving the European Union) has tilted the odds towards a cut in borrowing costs as early as September.
Growth momentum has been was slowing in the Malaysian economy, hence a rate cut in the benchmark interest rate would help shore up prospects for growth, they said the analysts.
Research houses have revised their growth forecasts for Malaysia and the OPR following the surprise Brexit decision.
But they said any rate cut decision at today’s meeting would be too premature as the impact from Brexit, European Union growth prospects, the new United Kingdom prime minister and the international tribunal decision on the South China Sea dispute is building up and would take several months to be felt here.
Nevertheless, the market is eager to hear the central bank’s views on the numerous global developments and risks on the horizon since the last meeting in May.
The monetary policy statement, which follows the two-day meeting chaired by governor Datuk Muhammad Ibrahim, which will be released at 3pm now today instead of 6pm as in the past, will indicate how dovish the central bank is towards a rate cut.
A gloomy global trade outlook emanating from the UK and EU and a fresh round of financial market volatility risks are external factors which will give rise to downside risks for the economy, which has been targeted to grow by 4-4.5 per cent this year.
Economist Julia Goh described the case for a cut as stronger if contagion risks materialise.
“However, the timing of a cut is uncertain as it is hard to gauge the immediate and longer term effects on Malaysia as events are still evolving amid several possible implications.”
So far, the Brexit decision holds less impact to on Malaysia’s trade, due to the small trade volume with the UK.
HSBC Bank thinks the OPR will remain unchanged while a cut in the statutory reserve ratio (SRR) is also unlikely, as the three-month Klibor has been gradually falling year-to-date.
“However, we believe an OPR cut is possible in September, as risks that growth could track below four per cent next yearin 2017 after Brexit become more evident,” said the bankit said, adding that there must be a watch for any signs of increased dovishness at this meeting.
To currency analysts, the delay in the United States Federal Reserve (Fed) rate hike has reduced the pressure on the exchange rate.
With the Fed rate hike no longer on the table, MIDF Research expects investors to rebalance their portfolio into emerging markets, which would lead the ringgit to appreciate.
The research house has circled two cuts of 25 basis points each in next two meetings, saying the central bank would need to stimulate the domestic economic activities as the leading indicator continues to decline into the negative territory.