Research house expects BNM to revise interest rates due to Covid-19 crisis

PETALING JAYA: Research house Affin Hwang expects Bank Negara Malaysia (BNM) to revise its interest rates again at its next monetary policy committee (MPC) meeting in early May or sooner in light of the Covid-19 pandemic.

In its overview analysing BNM’s annual report for 2019, Affin Hwang said BNM might lower its overnight policy rate (OPR) by 25 to 50 basis points to anywhere between 2% and 2.25% in 2020.

It said this might be done to curb the negative impact of the virus outbreak as well as the potential downside of low global oil prices on the domestic economy.

It added that the move would be in line with BNM’s goal “to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability”.

BNM cut its OPR to 2.5% in March, the lowest since July 2010, to counter the effects of the pandemic on economic growth.

It also predicted a range of -2.0% to 0.5% for the country’s GDP growth forecast, which is higher than Affin Hwang’s initial prediction of -3.5% for 2020.

The report states that the research body had set a “sharply lower growth projection on domestic demand growth”, at -4.0% for 2020 (compared with 7.6% in 2019), against BNM’s 1.1%.

It said its cautious view on the country’s domestic demand was due to restrictions under the movement control order (MCO), which has forced most businesses to close and people to stay home, and imposed restrictions on the entry of foreign tourists.

Affin Hwang’s lower GDP growth forecast was also due to its prediction that private consumption growth would not improve immediately in the second half of the year, as households would have lower purchasing power after suffering shocks to their income due to the MCO.

“Households are also likely to be cautious about their spending due to the uncertain employment situation. They will also be affected by the expected slower growth in real disposable income.”

If the crisis continues, it said, the impact on household income and employment would also lead to weaker consumer spending.

On the Prihatin Rakyat economic stimulus package – said to add 2.8 percentage points to GDP growth – Affin Hwang said the measures are expected to cushion the impact on households and businesses.

However, it noted BNM’s caution that the overall balance of risks to the economic growth outlook is still on the downside due to the ever-changing risks in the external and domestic environments, especially if Covid-19 persists.

“Commodity supply shocks will also pose a downside risk to the production and export of oil palm, natural gas and crude oil and in turn income growth,” the report said.

Meanwhile, Affin Hwang said BNM expects public consumption growth to increase by 5.9% compared to 2% in 2019. This would be triggered by the resumption of large-scale transport infrastructure projects such as the MRT2, LRT3 and Pan Borneo Highway, it said.

It said BNM predicted that the estimated RM15 billion in capital spending for these major transportation projects is expected to add 1.0 percentage points to the 2020 GDP growth.

“Furthermore, these projects are anticipated to be strengthened by a rise in public investment which is expected to register a slower decline of 7.5% from -10.8% in 2019.“

Public consumption growth will also be affected by the implementation of upstream oil and gas, telecommunication and power generation projects by public corporations, the report added.