Even if the United States Federal Reserve (US Fed) proceeds with the anticipated interest rate cuts, Bank Negara Malaysia (BNM) is likely to maintain the Overnight Policy Rate (OPR) at 3% through the end of 2025, according to Maybank Investment Bank Bhd (Maybank IB). This forecast comes amid a strengthening ringgit and persistent domestic inflationary pressures.
Fed Rate Cuts and BNM’s OPR Stance
Maybank IB noted that the US Federal Reserve is expected to start cutting interest rates as early as September 2024, given the current economic conditions of easing inflation and rising unemployment. The bank’s economics team anticipates a 50 basis points (bps) reduction in the Fed Fund Rate (FFR) in 2024, followed by an additional 100 bps cut in 2025.
However, despite the possibility of these rate cuts by the Fed, Maybank IB forecasts that BNM will maintain the OPR at its current level of 3% through 2025. This decision is influenced by the substantial 250 bps gap between the OPR and the current FFR of 5.25%-5.50%, coupled with the continued risk of domestic inflationary pressures.
Implications for Malaysian Banks
The forecasted steady OPR is seen as a positive development for the margins and non-interest income of Malaysian banks. “In the absence of rate cuts that could further exacerbate net interest margin (NIM) compression, we expect average NIMs to stabilize with potential upside bias into 2025,” Maybank IB stated.
Moreover, the investment bank highlighted that the resumption of growth in industry current account or savings account (Casa) balances will help alleviate margin pressure on banks, contributing to a more stable financial environment.
Outlook for Malaysian Government Securities (MGS) and Investment Portfolios
Maybank IB’s fixed income research team remains mildly bullish on Malaysian Government Securities (MGS), forecasting a 10-year MGS yield of 3.60% by the end of 2024, down from the current level of around 3.70%. This outlook is underpinned by the strengthening ringgit, which was traded at 4.493 against the US dollar on Monday.
The bank also noted that the steady OPR and positive ringgit outlook could enable banks to continue realizing marked-to-market gains on their investment portfolios, thereby supporting non-interest income. Additionally, the ongoing currency volatility is expected to keep forex income buoyant.
Impact on the Banking Sector and Foreign Investments
With the improved economic prospects, stable banking sector, and a strengthening ringgit, Maybank IB believes that the current environment is conducive to attracting further foreign inflows into the Malaysian banking sector.
“We expect this overall stance to be positive for Malaysian banks, both from a direct and indirect basis,” the investment bank concluded.
In summary, while the US Federal Reserve may proceed with rate cuts, BNM is expected to maintain its OPR at 3%, benefiting the Malaysian banking sector through stabilized margins, robust non-interest income, and a favorable environment for foreign investments.
