High chance of OPR cut as M3, credit growth drops further

Analysts see a bigger chance for Bank Negara Malaysia (BNM) to cut the Overnight Policy Rate (OPR) by 25 basis points in its next meeting as Malaysia’s broad money (M3) growth eased for the third straight month in March.

M3 growth eased for the third straight month to 4.6 per cent as at end-March, from six per cent in February, dragged by broadbased lower demand for funds from the private and public sectors, as well as a sharper contraction of demand for funds from foreign operations.

Economist Vincent Loo from RHB Research Institute Sdn Bhd (RHB Research) believed there is a strong likelihood BNM could reduce the OPR by 25bps to three per cent, probably as early as in May, given signs of a slowdown in the first quarter’s gross domestic product (GDP) growth along with subdued inflationary pressure.

“Of the key areas that the central bank seeks to balance – namely economic growth, inflationary pressure and

Of the key areas that the central bank seeks to balance – namely economic growth, inflationary pressure and exchange rates – we think growth is likely the main priority.

Vincent Loo, RHB Research economist

exchange rates – we think growth is likely the main priority,” he said in a note yesterday.

“We still expect M3 and loan growth to remain healthy at 5.5 and 5.2 per cent in 2019, from eight and 5.6 per cent for 2018.

“This should keep demandpull price pressure contained. We expect headline inflation to be subdued at 0.9 per cent in 2019, from one per cent for 2018, following the cap in fuel prices and the price dampening impact from the change in consumption tax.”

Similarly, Kenanga Investment Bank Bhd (Kenanga Research) also shared the same point of view.

“In view of an expected slowdown in the economy this year, both externally and domestically, loan growth is projected to ease further to 4.2 per cent in 2019.

“Coupled with subdued inflationary pressure and dovish stance of major central banks (i.e. Fed and ECB) and a growing number of regional central banks, we believe that the BNM now has a bigger leeway to cut its overnight policy rate by 25 basis points, possibly at its next Monetary Policy Committee meeting on May 7.”

This comes as loan growth retained a downtrend in March, registering a 10-month low expansion of 4.9 per cent year on year (y-o-y), mainly driven by slowdown in loans extended for construction, working capital and personal use.

Meanwhile, loans for the purchase of consumer durables and passenger cars continued to deteriorate, indicating elevated precautionary sentiments among consumers against the backdrop of a slower economic growth.

On a sectoral basis, construction as well as mining and quarrying led the slowdown observed during the month.

On a MoM basis, loan growth accelerated to 0.4 per cent, in spite of slight increase in weighted average lending rate of commercial banks to 5.03 per cent.

On a similar trend, deposit growth decreased to a sixmonth low of 5.3 per cent, predominantly triggered by tapering growth of fixed deposits, saving deposits and foreign currency deposits.