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
    irvinseah@dbs.com

    Nathan Chow

    Strategist/Economist
    nathanchow@dbs.com



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