US interest rate cut unlikely to influence Bank Negara

PETALING JAYA: The interest rate cut announced by the US Federal Reserve on Wednesday is unlikely to affect Bank Negara Malaysia’s (BNM) decision on whether or not it will maintain the Overnight Policy Rate (OPR), according to economists.

The central bank will be holding its monetary policy meeting next Tuesday. The last rate cut it made was in May this year, bringing the key interest rate down by 25 basis points (bps) to 3%, from 3.25%.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie told SunBiz it is unlikely that BNM will reduce the OPR from its current level, at least until the first quarter of next year.

“Each central bank will assess the country’s own economic conditions on whether it needs to cut interest rates. For Malaysia, BNM was the first to make cuts in May, and then we saw other central banks follow suit.

“Looking at the indicators, I think the central bank will likely wait and see. It will take about three (consecutive) quarters for the (last) interest rate deduction to have any impact on the economy,” Lee said.

He added there needs to be a strong justification for BNM to take on further easing.

“Though we are seeing quite mixed economic indicators, especially with the continued weakening exports, I think the strength of domestic demand is likely to underpin growth in the second half.

“Overall, I believe Budget 2020, which is somewhat expansionary, should be able to keep growth within expectations of 4.5%. Any change to the monetary policy is likely to be data dependent,” he said.

According to a note, HLIB Research said it expects BNM to maintain the OPR at 3% in the upcoming policy meeting, but a cut of 25bps by first-quarter 2020 is predicted.

However, MRR Consulting Sdn Bhd managing partner Ooi Kok Hwa believes the central bank will announce a rate cut in the upcoming meeting.

“The Fed (on Wednesday) did say that they will adopt a ‘wait-and-see’ attitude for subsequent committee meetings, but I feel there may be another cut announced in December as the US economy is showing signs of a slowdown.

“Our meeting is next week, and since regional markets have also taken on rate cuts, I think there is a likelihood we will follow suit,” he told SunBiz.

Ooi said this rate cut will impact profits for the Malaysian banking sector, especially for institutions that are highly reliant on floating interest rates.

“This will affect loan growth, as the base rate will come down, but this is just a short-term effect in my view. I foresee higher loan growth next year, which will offset the lower net interest income,” he added.

On Wednesday, the Federal Open Market Committee said it was reducing the US federal funds rate by 25bps to a target range of between 1.5% and 1.75%, the third such cut this year. It also said it would hold off on making further reductions unless the US economy showed signs of taking a turn for the worse.

Fed chairman Jerome Powell said he felt the US economy is doing well, given the country’s robust consumer spending, strengthening home sales, and “healthy” asset prices.

source https://www.thesundaily.my/business/us-interest-rate-cut-unlikely-to-influence-bank-negara-YB1560274