Risk aversion around coronavirus; Bank Negara surprise cut

PBOC’s policy stance will likely stay supportive to fulfil policy and growth targets. BNM cut could be seen as an insurance cut.
Irvin Seah, Nathan Chow23 Jan 2020
    Photo credit: AFP Photo

    China’s sovereign yield slips to 5-month low on virus fear

    Government bond yields have fallen for four straight sessions on fears the rapidly spreading coronavirus would derail the economic recovery. 10-year sovereign yield on Wednesday fell 2bps to 3.028%, a level last seen in August when the economy showed signs of slowing amid heightened trade tensions with the US. This could also be attributed to PBOC’s liquidity injection. The authorities offered RMB580bn of 14-day reverse repurchase agreements this week, putting the figure at RMB1.18tn since January 15. PBOC also added RMB300bn through the medium-term lending facility earlier to offset the impact of factors including tax payments and cash demand ahead of the week-long Lunar New Year holidays kick off this Friday. Interbank liquidity conditions have improved subsequently, reflected in declines in major interbank money market rates. Overnight SHIBOR and repo rate retreated from last week highs of 2.6540% and 2.6600% to 1.5340% and 1.5300%, respectively.

    Meanwhile, PBOC kept the one-year loan prime rate unchanged at 4.15% this week. A less tense external environment may allow for a more moderate pace of easing in the near term, in our view. Yet the outlook remains cautious as tariff on USD370bn worth Chinese exports remained. Domestically, private sectors have continued to suffer from financing difficulties. As such, PBOC’s policy stance will likely stay supportive to fulfil policy and growth targets. We foresee a 40bp lowering of the one-year LPR and further reduction in banks’ require reserve ratio over the course of the year. Bond yields are expected to edge lower amid PBOC’s accommodative stance.

    A surprise cut by Bank Negara

    Bank Negara Malaysia (BNM) surprised the market yesterday by cutting the Overnight Policy Rate (OPR) by 25bps to 2.75%. Policymakers alluded to the policy action as “a pre-emptive measure to secure the improving growth trajectory amid price stability”. While this could be seen as an insurance cut, we reckon that this policy move is far from being pre-emptive.

    Leading economic indicators are already improving against the backdrop of the de-escalation in the US-China trade tensions. Indeed, the central bank expect economic growth to improve this year, with the official target of 4.8% announced in the last Budget. On the flip side, inflation is picking up, and will likely more than doubled (DBSf: 1.6% for 2020) the average of 0.7% registered in 2019. With improving economic climate and rising inflation, this latest monetary action by BNM is at most an insurance cut.

    Looking forward, there is little room for further monetary easing given the changing growth and inflation dynamics. Although the spread of the Wuhan virus could present some near term risks, this could be beyond the scope of monetary policy and more appropriate to be dealt with via fiscal measures. We believe BNM will now maintain a stable monetary policy and allow the combined stimulus effect of the fiscal budget and the latest monetary action to run its course. Barring any unexpected negative shock, the OPR is expected to remain unchanged at 2.75% for the rest of the year.

    Irvin Seah

    Economist - Singapore, Malaysia & Vietnam

    Nathan Chow


    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.