Bank Negara can opt for further cut in lending rate

While equity markets and the financial industry assimilate the surprised move by Bank Negara Malaysia to cut its lending rate, research houses are already of the opinion that rates are in for a further reduction, but all for a good reason.

The central bank's aim is primarily to sustain Malaysia's economic growth which has been forecast to grow between 4.0 and 4.5 percent this year.

Hong Leong Bank opined that the central bank was taking a preemptive measure to wary the risks and repercussions arising from 'Britain exit' (Brexit) referendum.

Yesterday, at the end of the two-day monetary policy meeting, BNM announced a 25 basis points cut in the overnight policy rate (OPR) to 3.00 percent, the first since 2009, to ensure the economy remained on a steady growth path.

READ: BNM's surprise rate cut will curb downside risks - Economist

From April 2006, the OPR was hovering at a high of 3.50 percent until Oct 2008 and dipped to a low of 2.0 percent in Feb 2009 and continued to rise gradually thereafter to 3.25 percent before yesterday's cut.

Hong Leong Bank acknowledged that the monetary policy statement by BNM suggested that the next course of action would largely dependent on upcoming economic indicators, in addition to monetary and financial conditions.

"Recognising downside risks to domestic growth, arising from both domestic uncertainties and external headwinds, we opine further policy easing is possible," said the bank in a research note released today.

The next monetary policy meeting is scheduled for Sept 7, 2016.

In addition, the diminishing United States Federal Reserve rate hike outlook would also offer more room for BNM to nudge rates lower.

"The global and domestic growth prospects are already fragile confronted by mounting headwinds, the outcome of the EU referendum is the last straw that broke the camel's back in our view.

"BNM has toned down its assessment on the domestic economic outlook," he said, adding that uncertainties in the global environment could weigh on Malaysia's growth prospects.

The monetary policy meeting will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

"By cutting rates, the central bank is trying to entice further domestic borrowing in the hope of lifting growth prospects at a time when the global economic environment itself remains uncertain," said FXTM Vice-President for Corporate Development and Market Research Jameel Ahmad.

He said local equity markets were likely to trade higher following the news because the stimulus measure was seen as a positive attempt to encourage growth, and this is generally how equity markets react globally.

"The Malaysian Ringgit appears to have gained slightly in the aftermath of the decision.

"However, this is probably attributable to the increased risk appetite seen across global markets as concerns over the outcome of the EU referendum begins to subside into the backdrop," he added.

At 9am today, the local unit was quoted firmer at 3.9600/9650 against the greenback from 3.9690/9740 at 5pm on Wednesday.