BNM's OPR decision a balancing act, says Standard Chartered

KUALA LUMPUR (Jan 19): Bank Negara Malaysia (BNM)'s decision today on the overnight policy rate (OPR) is a toss-up between the country's inflation rate and the risk of capital outflows, said Standard Chartered Bank Malaysia Bhd.

The bank's head of fixed income, currencies and commodities investment strategy, Manpreet Singh Gill, said this ahead of the central bank's announcement that it is keeping the benchmark interest rate unchanged at 3%.

"Inflation in Malaysia has come in low, [as] many Asian countries are a bit of an exception to a rise in inflation, which is good, but that by itself says there is room to cut rates to support growth, and that is one simple way to look [at] it," said Manpreet.

"The risk with that is if you are in an environment where US dollar yields are going up [and] if you cut rates too far, too quickly or in the wrong environment, you may end up triggering more capital outflows which [poses] a currency risk to financial stability.

"So I think BNM is really sort of balancing out these two factors, and given that we are already seeing signs of capital flows coming back [into Malaysia], we think that in some point in the year BNM will cut rates given the opportunity.

"[However,] I think [the central bank] will keep a tight eye on what the global capital flows look like, on whether they want to follow through with the cut, or keep things where they are," he said this at a news conference in conjunction with the release of Standard Chartered's Wealth Management Advisory Group's Outlook 2017.

Yesterday, the Department of Statistics Malaysia released the country's inflation numbers, which showed that the country had registered an inflation rate of 2.1% in 2016, which was at the lower end of BNM's projection of 2% to 2.5%. — theedgemarkets.com