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Analysts Have Mixed Views On Overnight Policy Rate Direction


Analysts have mixed views on whether the overnight policy rate (OPR) will be maintained or not this year, with MIDF Research expecting a cut in second half of 2016 and Hong Leong Investment Bank (HLIB) Research expecting it to be kept at 3.25%.

HLIB Research said the tone of central bank’s monetary policy committee (MPC), which kept the OPR unchanged at 3.25% last Thursday, was broadly unchanged from its previous statement.

“We deem the MPC’s overall stance as neutral, amid downside risks in the global economy. We view this as a favourable development as it is seen as a continuation of policy to anchor financial stability, as it was during governor Zeti’s administration,” said HLIB Research in a report last Friday.

The MPC expects the economy to improve, driven by domestic demand and inflation momentum to trend lower for the rest of 2016 due to low energy and commodity prices.

It said that Bank Negara Malaysia’s expectation of an improvement in economic activity is in line with its expectation of growth to improve in 2H16 arising from continued recovery in consumption supported by measures to raise disposable income, sustained pick-up in construction sector following larger-than-expected value of contracts awarded in Q1’16 and normalisation in agriculture production given the fading El Nino effect.

“We opine that loan growth should record a moderate recovery in 2H16 after recording a weak reading in Q1’16, in tandem with improvement in domestic economic activity,” said HLIB Research. It maintained its CPI growth forecast for 2016 at 2.5%.

“There are still plenty of drivers to support domestic growth despite rising external uncertainty. We maintain our 2016 gross domestic product (GDP) growth forecast at 4.2%,” HLIB Research said.

Meanwhile, MIDF Research maintained its expectation that BNM will cut OPR by 25 bps in September 2016, due to global economic uncertainty, weak performance of manufacturing sector, and softening money supply and deposit growth.

“The cut would be in line with global monetary policy directions, which are generally heading for an expansionary monetary policy except for the US. We maintain our inflation forecast for year 2016 at 2.6% and OPR forecast to be at 3% by year-end,” it said in its report.

Money supply shrunk for the first time since March 2000 by 1.7% in March 2016, which MIDF Research deems a troubling development, as it could potentially lead to economic slowdown due to less liquidity and transactions in the economy.

“We believe this could be due to various economic factors, particularly from the external fronts including global manufacturing slowdown and weak trading activity,” it said.

It said that the growth of demand deposit, which fell by 4.4% in the same period, could potentially lead to lower domestic demand in the future.