Economists: Further rate cut needed if recovery is derailed

By Rupa DamodaranPublished: 2009/05/01

BANK Negara Malaysia (BNM) may have applied the brakes on its monetary easing stance, but economists warn that the recovery path in the second half of 2009 could be patchy with the potential impact of the swine flu.

"If the growth recovery in the second half of 2009 is derailed or stalled by a worsening swine flu outbreak, then the risk is that further Overnight Policy Rate (OPR) cuts may once again be necessary," warned Alvin Liew of Standard Chartered Bank.

He was commenting on Bank Negara's decision to leave the OPR unchanged at 2.0 per cent after its monetary policy committee meeting on Wednesday.

Bank Negara said the domestic economy will improve in the second half of 2009, supported by stabilisation in global economic conditions and the larger impetus from the implementation of the fiscal stimulus measures.





"With the economy likely to hit a very rough patch in the first half of 2009, the feedback loop to the banking sector is likely to manifest itself as an increase in non-performing loans (NPLs)," Liew said.

He expects the central bank to switch its attention to lending, particularly ensuring that banks are passing the rate cuts to borrowers and that there is continued financing to businesses and individuals.

"We believe that it is extremely important to ensure that (fundamentally strong) companies have access to operating capital and remain in business," Liew said.

DBS Bank also felt that BNM's latest move marks the end of the current interest rate easing cycle, and expects the central bank to maintain the current OPR for the rest of the year.

AmResearch, however, expects to see a further reduction of 50 basis points in OPR by June this year, especially in view of sustained weakness in the economy, potentially leading to a full-year contraction of 2.0 per cent in 2009.

"Given anticipation of a further cut in OPR later this year and potential deterioration in trade and investment activities, the pressure would be enormous on the ringgit to sustain its strength," it said, targeting the local currency to trade between RM3.60 and RM3.65 to the US dollar for the rest of 2009.

OSK Investment Bank said with the rate pause and quantitative easing in the US, the ringgit will be more attractive than the greenback.

In a research note, it noted a possible strengthening against the US dollar due to higher interest rates to give higher return to foreign investors compared to the US Fed Fund Rate of 0.25 per cent.

The bilateral currency swaps with China, Hong Kong and Indonesia to promote bilateral trade will eventually reduce the heavy reliance on greenback, it said, adding that the US may upsize its quantitative easing to purchase toxic assets in the months ahead if major companies continue to report big losses in the next quarter.

OSK has revised its currency forecast from an average RM3.65-3.70 to RM3.60-3.65 against the greenback for 2009, while maintaining the 2010 forecast at RM3.40-3.45.