BNM likely to ease monetary policy again this year, says Capital Economics

Bank Negara Malaysia (BNM) is expected to ease monetary policy again later this year, after having already cut its policy rate from 3.00 percent to 2.75 percent, and with growth set to slow further over the next couple of quarters, according to the latest research report from Capital Economics.

Only two of the 26 analysts polled by Bloomberg correctly predicted BNM would cut rates today. Even though the Bank loosened policy, it didn’t sound very downbeat about the outlook for growth, instead describing the decision as a “pre-emptive measure” to “secure the improving growth trajectory”.

BNM did not say whether it was sticking with its 4.3-4.8 percent forecast for this year but did state that it expected “growth to gradually improve”, the report added.

This contrasts with the latest economic data, which have been weak. Growth slowed to 4.4 percent in Q3 and our GDP Tracker – which is based on timely activity and export data – suggests that the economy slowed again last quarter.

Fiscal policy is set to become much less supportive. The 2020 budget envisages a sharp tightening in fiscal policy, with spending set to fall by around 8 percent, Capital Economics further noted.

The central bank has nothing to fear on the inflation front. Headline inflation was just 1.0 percent y/y in December and should remain in the low-1 percent range for most of 2020, as weaker demand keeps a lid on underlying price pressures. In its statement, BNM said that it expects headline inflation “to average higher in 2020 but remain modest”.

"The upshot is that, with economic growth likely to disappoint and inflation unlikely to stand in the way of further easing, we think BNM will cut interest rates again this year. We have pencilled in one further 25bp rate cut, probably in the second half of this year," Capital Economics also commented in the report.