May’s deflation not a reason for another OPR cut — economists

KUALA LUMPUR (June 24): Malaysia recorded yet another deflation in May — the third monthly deflation in a row — but this is no reason for Bank Negara Malaysia to further cut the Overnight Policy Rate (OPR), said economists.

The view is that the current low OPR of 2%, coupled with large-scale stimulus packages and other measures introduced by the Government, have provided ample support for the country’s economy amid the COVID-19 crisis.

“There is a surge in risk appetite despite the economic and COVID-19 related risks. As such, we think this warrants caution in expecting further rate cuts,” wrote UOB Economics & Markets Research’s senior economist Julia Goh and economist Loke Siew Ting in a note today.

Bank Negara’s Monetary Policy Committee (MPC) is scheduled to meet for a fourth time this year on July 6 and 7, to review the OPR. At its previous meeting in May, the MPC trimmed the key interest rate by 50 basis points (bps) — the most since February 2009 — after making two successive rate cuts of 25bps each in March and Jan.

The total 100bps OPR cut has left investors searching for higher returns. This led to a spike in domestic retail participation in the local bourse. “Local retail buying rose 169% from RM8.5 billion last December to RM22.8 billion in May,” Goh and Loke noted.

The three successive rate cuts, they said, could potentially lift the country’s Gross Domestic Product (GDP) by 0.6% to 0.8%, backed by the reopening of economic sectors and sustained flattening of COVID-19 infection curve.

This sentiment was echoed by Bank Islam Malaysia Bhd chief economist Dr Afzanizam Abdul Rashid, who said the OPR should stay pat at 2% for the remainder of the year, and possibly for the next year too.

“BNM can cut the OPR at any time now because inflation is not an issue. However, the gradual reopening of the economy means economic activities will start to pick up pace. The question then is whether it makes sense to cut the OPR excessively? It’s like an overdose if they cut the rate again. Things are starting to pick up. The more sensible thing to do is to allow its previous policy response to work its way through,” he told

Malaysia’s inflation, as measured by the Consumer Price Index (CPI), declined 2.9% in May from a year earlier, led by the drop in the transport component on lower fuel prices, though food and non-alcoholic beverages continued to record price increases as demand for essential items went up. Without the fuel component, CPI in May was at a positive rate of 0.1% compared with 0.2% for April, according to the Statistics Department.

“I’m not surprised with the numbers since the primary mover was the low fuel prices. So, it’s not an outright deflation since other prices are still rising, especially food-related items,” said Afzanizam.

Sunway University economics professor Dr Yeah Kim Leng said core CPI, which excludes volatile food and energy items, remained positive — albeit marginally — suggesting that “deflationary pressures are not broad-based or demand-driven, but energy cost-based”.

“As in the previous month, the key factor underpinning the CPI year-on-year decline in May is the sharp drop in the transport component due to the crude oil price collapse. The below trend core CPI of around 1% is indicative of subdued or weak demand. It affords flexibility for interest rates to move lower, although such a move could weaken the ringgit and raise import prices while benefiting exporters,” said Yeah, who is formerly an MPC member.

MIDF Research, however, thinks Bank Negara could undertake another 25bps cut in OPR for this year, in view of the low inflationary pressure and more downside risks to the economy. Besides the pandemic-driven risks, there is rising global trade tensions and political uncertainties in countries like the US, where a presidential election is due this year.

The research house also foresees that inflation will average to negative 0.5% this year, compared with 0.7% for 2019.

“Prices of utilities particularly electricity will continue to decline following the rebates under the Government stimulus package for six months effective from April. In addition, high volatility in global crude oil prices which skew towards the low side will influence fuel-related components.

“As housing, utilities and transport are the biggest components in the overall CPI basket after food and beverages, we opine these to have a significant impact on overall inflation,” it said.

“Besides that, we do not foresee any major demand-pull inflation due to the COVID-19. Some upward pressure could be expected in the food component through imported inflation as Malaysia is a net importer of food and the weaker ringgit will result in items being more expensive,” it added.

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