Room for OPR cut remains as inflation still subdued
KUCHING: As the country’s headline inflation saw a marginal rebound of 0.2 per cent year on year (y- o-y) in March, analysts expect Bank Negara Malaysia ( BNM) to possibly see room for a cut in the Overnight Policy Rate (OPR).
The team at Kenanga Investment Bank Bhd (Kenanga Research) saw that headline inflation recorded a marginal rebound of 0.2 per cent y- o-y last month after declining in January and February this year – a tad below the consensus and house estimate of 0.3 per cent.
Overall for the first quarter, the inflationary pressure remained muted, with the index down by 0.3 per cent y- o-y, reflective of the changes in retail oil pricing mechanism at the start of 2019 as well as the lack of demand-pull pressure.
“For this year overall, we foresee that the floating of domestic fuel prices, slated for July, and low base effect arising from the tax holiday period from June to August 2018 to technically lift up inflation in the second half of the year.
“However, we expect any upside would be limited largely due to heightened risks emanating from the external front, namely the slowdown in global growth and the ongoing trade dispute amongst China, the US, and potentially the EU,” it opined.
“These may spillover to the domestic front, seeping through as a hindrance to economic activity. Against this backdrop, we believe that inflation would likely hit the lower end of our forecast range of one to 1.5 per cent in 2019.
“As such, we believe that BNM now has a bigger leeway to cut its overnight policy rate by 25 basis points, possibly at its next Monetary Policy Committee ( MPC) meeting on May 7.”
In a separate report, AmBank Economics concurred with this view.
“With subdued inf lationary pressure as well as key macro data suggesting evidences of the economy moderating, there is ample room for BNM to potentially institute a rate cut,” it said.
“For now, we are looking at a possible rate cut likely to take place in July by 25bps from the current 3.25 per cent rate.
“We are playing down the possibility of a rate cut in the May MPC meeting given the current domestic noises, such as the possibility of an exclusion from the FTSE Russell and risk of Moody’s downgrading, thus weakening ringgit.”
On this point, RHB Research Institute Sdn Bhd previously expected BNM to keep the OPR stable but now sees increasing likelihood of it being cut as economic growth seems to be heading closer to the weaker end of BNM’s forecast and due to a rise in the real policy rate amid subdued inflation.
“We are also of the view that a window for a rate cut may have arose, after the US Fed hinted at a rate pause in its March meeting,” explained RHB Research economist Vincent Loo.