BNM has leeway to cut OPR after Fed rate cut
As widely expected, the US Federal Reserve (Fed) cut its key interest rate by 25 basis points (bps), citing concerns over “implications of global developments” on the economic outlook as well as “muted inflation pressures.”
This marked the first time that the central bank has reduced the benchmark interest rate since it battled the financial crisis in 2008.
The Fed also decided to preemptively end its process of shrinking its balance sheet, or quantitative tightening, two months ahead of schedule.
“It's not clear where the Fed is going from here as the rate cut decision is unprecedented and unusual to say the least. Nevertheless, market is looking at another possible 25bps cut before year end.
“Given Malaysia's controlled inflation and a widening output gap we believe Bank Negara Malaysia (BNM) has the scope and room to cut interest rates if it requires to do so,” said the team at Kenanga Investment Bank Bhd (Kenanga Research).
“As domestic growth trajectory remains only slightly below growth potential and the inflationary trend is expected to gradually pick up in the 2H19, we expect BNM to maintain its accommodative monetary stance and the overnight policy rate to remain at three per cent in 2019 after a 25bps cut decision in May.”
In a statement, the Federal Open Market Committee said it still sees “sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric two per cent objective, but uncertainties about this outlook remain.”
“This explains why the market termed the Fed decision as an “insurance cut” as there are no clear evidence of inflation around the corner while unemployment remains below four per cent except that there are some troubling signs of economic weakness abroad, and President Donald Trump's ongoing trade wars and intermittent threats of tariffs on some of America's largest trading partners mainly China,” it said.
At a press conference, Fed Chairman Jerome Powell spooked investors by suggesting that the FOMC would take a more cautious approach to easing than they had expected, hinting at least one more cut but gave no guarantees.
On this move, OCBC head of strategy and research Selena Ling said they had previously warned that markets would adopt a “buy on rumour and sell on fact” mentality to this Fed easing.
“Nevertheless, the fact that US-China trade talks have ended inconclusively with only the commitment to keep talking (with the next meeting in early September), Trump's sustained pressure on Powell to keep up with monetary policy easing ahead of the 2020 elections and continued signs of global economic momentum deceleration, we keep our call for another 25bps rate cut in September and possibly another 25bps cut in December,” she said yesterday.
In a separate note, AmBank Research felt there was a range of things that the Fed was looking at.
“The low inflation allows the Fed some latitude to take pre-emptive steps and hopefully avoid moving into the future to something like negative rates,” it opined.
“Because the Fed cut only 25bps, it avoided doing what some would have felt was more “shock and awe” with 50bps. So, it can move towards a language like “data dependent” now that it has shown that it is prepared to be flexible. Hence, the Fed has left the door open to future cuts.”
Hong Leong Investment Bank Bhd (HLIB Research) forewarned that should US-China trade tension continue and inflation remain muted, it may lead the FOMC to cut another 25bps towards the end of the year.