Bank Negara expected to cut OPR in second half

PETALING JAYA: Bank of America Merrill Lynch (BofAML) expects Bank Negara Malaysia (BNM) to cut the overnight policy rate (OPR) by 25bps in the second half of the year, due to weaker consumer spending, investments and exports that would lead to significantly slower growth.
"Our view for a policy easing this year stems from our view that prospects have been dampened by a severe fiscal and investment shock from lower energy prices," ," its Asean economist Chua Hak Bin said his research report yesterday.

"The liquefied natural gas (LNG) prices however lag global oil prices by four to six months. Currently, LNG prices are holding up relatively well, down by about 15% versus 40% fall in oil prices," he added.
He also noted risks that Japan may approve the restart of nuclear reactors, which is negative for LNG exports as Japan remains the largest market.
Recently, Treasury secretary-general Tan Sri Dr Mohd Irwan Serigar Abdullah said steps will be taken to ensure the current account remains in surplus. The budget for next five years will be based on crude oil prices at US$70 to US$80 per barrel, above current levels of around US$55.
"We also see growing tail-risks given political developments and 1Malaysia Development Bhd (1MDB). A ratings downgrade from Fitch is also 'more likely than not' in May/June," said Chua.
However, Chua expects BNM to maintain the OPR at the next Monetary Policy Committee meeting scheduled on May 7, as the gross domestic product (GDP) growth did not slow significantly in the first quarter to justify a rate cut.
Industrial production expanded 6.1% in January-February, improving slightly from 5.8% growth in the fourth quarter last year while strong consumer spending in March before the implementation of the Goods and Services Tax also supported the GDP in the first quarter.
Chua said BNM governor Tan Sri Dr. Zeti Akhtar Aziz recently highlighted that "risk to higher inflation is not there", allowing for the current accommodative stance.
"She noted that the mid-point of GDP growth may be 4.8% in 2015, rather than previously forecast 5% (of 4.5% to 5.5% range)," he said.
Meanwhile, foreign reserves have been falling on large capital outflows, declining US$5.4 billion in March to US$105.1 billion, closing in on the US$100 billion psychological threshold and at its lowest level since October 2010.
"We estimate that BNM ran down reserves by about US$3.8 billion in March to defend the ringgit (with the rest largely due to translation losses). FX reserves cover to import stands at just 6.1 months (lowest in more than a decade) while cover to short-term external debt has fallen below 1 time."
Chua said the ringgit will likely come under pressure when LNG prices fall more significantly and worsen current account in the second half, on top of 1MDB risks and prospects of Fed rate hikes.