Expect The Unexpected

SUMMARY

► OPR rate cut from 3.25% to 3.00%

► The cut was unexpected but timing is suitable

► Our strategy for local fixed income portfolios remains

Bank Negara Malaysia (BNM) unexpectedly cut the Overnight Policy Rate (OPR) from 3.25% to 3.00% in their 13th July Monetary Policy Meeting. This is the first OPR rate cut since 2009 after having raised interest rates in subsequent years and more recently by 25 basis points (bps) in 2014.

This came as a shock as consensus was not expecting a cut from the central bank this soon. The last Monetary Policy Committee (MPC) statement in May was neutral. This cut goes against the typical convention, whereby the central bank communicates a potential change in stance before acting upon it in the next meeting.

However the timing of the cut was more than suitable with inflation remaining low, the Ringgit being stable and poor global economic conditions being conducive. Based on MPC’s statement, the cut was largely motivated by softer external outlook due to Brexit. The Committee said, “Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom”.

Overall, the statement had a hint of a dovish tone to it, highlighting the increasing signs of moderate growth momentum globally. This could weigh upon Malaysia’s growth prospects, thus leaving the door open for further easing later. The immediate reaction to the local bond market saw government bond yields dropped sharply, between 6-11bps across the MGS and GII curves as investors scurried to capture the rally whilst the Ringgit gained in tandem. We do not rule out that BNM could cut interest rates further in their coming meetings this year but the decision will largely be data dependent. The markets on the other hand may price in a chance that another rate cut is imminent. We stick to our strategy of remaining long duration for our local fixed income portfolios. Global yields have continued to remain low in the face of significant global economic uncertainty and this should bode well for the local market as investors continue upon their hunt for yields.

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