BNM unlikely to follow US Fed rate cut, eyes domestic and global conditions

KUALA LUMPUR: Bank Negara Malaysia (BNM) is unlikely to move in direct lockstep with the US Federal Reserve's (Fed) aggressive move which slashed interest rates by a half-point during its Federal Open Market Committee (FOMC) meeting yesterday.

The Fed decided to cut the Fed Funds Rate (FFR) by 50 basis points, bringing it to 4.75 per cent - 5.00 per cent from 5.25 per cent - 5.50 per cent.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said Malaysia's economy, highly open to international trade and capital flows, is particularly sensitive to external factors.

"As such, any policy action by BNM will depend on global growth prospects and how they impact Malaysia's external demand.

"Given the current global economic environment, BNM may lean towards an easing bias if global growth poses a significant risk to the domestic economy," he told Bernama.

He noted that Bank Indonesia (BI) has recently reduced its benchmark interest rate by 25 basis points to 6.00 per cent.

Hong Leong Investment Bank in a research note said it expects BNM to keep the overnight policy rate (OPR) steady at 3.00 per cent for the remainder of the year as inflation remains moderate while gross domestic product has advanced following recovery across sectors due to a low base effect.

Nonetheless, Mohd Afzanizam said Malaysia's total exports have remained resilient, posting a solid 12.3 per cent growth in July versus June's 1.7 per cent, driven by strong performances in key sectors such as agriculture (32.8 per cent), manufacturing (10.6 per cent), and mining (10.2 per cent).

He noted that the exports to major economies such as the United States (30.9 per cent), the European Union (14.2 per cent), and Singapore (18.1 per cent) were robust, although shipments to China fell by 11.4 per cent.

"As a result, the likelihood of monetary easing in Malaysia remains low. Additionally, BNM remains cautious of inflation risks, especially with the potential RON95 subsidy rationalisation," he added.

Historically, the OPR has been higher than the US FFR, with an average spread of 111 basis points, he said.

Mohd Afzanizam reckoned that BNM is expected to maintain this spread, which could benefit the ringgit by making ringgit-denominated assets more attractive to foreign investors.

"In this context, we anticipate the USD MYR exchange rate to close the year around RM4.20 (previous forecast: RM4.40)," he said.

-- BERNAMA