Room for BNM to stay put on OPR next week

> Stan­dard Char­tered re­vises out­look, ex­pects cut only in late first quar­ter of 2017

The Sun (Malaysia) - - SUNBIZ -

PE­TAL­ING JAYA: Stan­dard Char­tered Global Re­search (Stan­Chart) sees room for Bank Ne­gara Malaysia (BNM) to cut rates only in late first quar­ter 2017, ver­sus its previous ex­pec­ta­tion of a 25bps cut at the cen­tral bank’s Mon­e­tary Pol­icy Com­mit­tee’s meet­ing next week.

“The Malaysian econ­omy re­mains soft; how­ever, we see room for BNM to keep the Overnight Pol­icy Rate un­changed at 3% on Nov 23,” it said in a re­port yes­ter­day.

It ex­plained that re­cent data showed signs of sta­bil­i­sa­tion, al­beit at weak lev­els. Third quar­ter 2016 gross do­mes­tic prod­uct (GDP) sur­prised to the up­side, at 4.3% yearon-year, bring­ing the nine months of 2016 GDP growth to 4.15% year-onyear.

This is within the gov­ern­ment’s growth fore­cast of 4.0%-4.5% for 2016, whereas the first half of 2016 growth of 4.05% was just above the low end of the range.

“We be­lieve BNM con­tin­ues to re­gard mar­ket com­mu­ni­ca­tion as im­por­tant, and it ap­pears to be con­vey­ing a neu­tral mon­e­tary pol­icy stance,” said Stan­Chart.

It said the risks to the Malaysian econ­omy re­main to the down­side. Pri­vate con­sump­tion may have been boosted while one-off pay­outs to civil ser­vants may have helped bol­ster spend­ing. How­ever, labour met­rics con­tinue to soften.

“Al­though BNM recog­nises the chal­leng­ing global eco­nomic con­di­tions, we be­lieve that fur­ther de­te­ri­o­ra­tion will re­quire a mon­e­tary pol­icy ad­just­ment. Po­ten­tial trade pro­tec­tion­ist poli­cies from the US and a hard im­pact on euro-area growth from Brexit are key risks that need mon­i­tor­ing. China re­mains the ele­phant in the room, but growth risks in the coun­try ap­pear sta­ble for now,” said Stan­Chart.

It added that the US pres­i­den­tial elec­tion out­come adds a layer of com­plex­ity to its view on mon­e­tary pol­icy, and it would closely watch the im­pact of re­lated un­cer­tainty on Asian fi­nan­cial mar­kets.

Stan­Chart shifted its du­ra­tion out­look on Malaysia Gov­ern­ment Se­cu­ri­ties (MGS) to neu­tral from pos­i­tive, say­ing that ex­treme for­eign ex­change volatil­ity is likely to cause for­eign sen­ti­ment to­wards MGS to de­te­ri­o­rate in the near term.

“We be­lieve po­si­tion­ing has been the key driver of the sell-off in the bond and swap mar­kets. Our re­cent client con­ver­sa­tions sug­gest that fast-money ac­counts had heavy re­ceive po­si­tions in front-end ring­git in­ter­est rate swap, given that off­shore in­vestors largely ex­pected BNM to shift to a more dovish pol­icy stance.”

Its dis­cus­sions also sug­gest that real-money in­vestors have ex­tended du­ra­tion in MGS on the back of curve-flat­ten­ing ex­pec­ta­tions.

“Q3 GDP growth beat mar­ket con­sen­sus, at 4.3%; this may have a bear­ing on BNM’s pol­icy stance, rais­ing the like­li­hood that it will keep rates un­changed rather than cut.”

Its neu­tral out­look is based on high cash hold­ings by on­shore longer-term in­vestors.

“In the near term, we ex­pect for­eign in­vestors – es­pe­cially emerg­ing mar­ket lo­cal cur­rency bond funds – to re­duce their al­lo­ca­tions to Malaysia. Their un­der­weight against the bench­mark in­dex is likely to rise to 2%-3% from 1% as of end-Oc­to­ber.”

In ad­di­tion, Stan­Chart said, for­eign out­flows from short-end MGS will be vul­ner­a­ble to for­eign ex­change weak­ness.

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