KUALA LUMPUR (July 2): CIMB Treasury and Markets Research economists are now among a growing number of research houses that are anticipating an overnight policy rate (OPR) cut decision at the upcoming Monetary Policy Committee (MPC) meeting later this month, saying key data points support such a move.

In a research note issued Wednesday, CIMB's economists predict Bank Negara Malaysia's MPC will implement a 25-basis-point cut, bringing the OPR down to 2.75%. This is intended to support growth amid deteriorating trade conditions globally and a softening domestic economy.

It highlighted that exports had contracted in May on softer demand for non-electrical and electronics (E&E) goods and regional weakness while tariff risks, weak global sentiment and weak Purchasing Managers' Index (PMI) readings suggest further export headwinds. Also in May, credit growth moderated, led by slower household and business loans, while retail trade and vehicle sales signalled softening consumption.

A rate cut would lower loan costs, potentially stimulating consumer spending and investments, which could boost economic growth. However, such a decision could also reduce returns for savers and lead to a weaker ringgit as foreign investors who seek higher returns may move their money out of Malaysia.

The OPR has remained at 3% for over two years. The key rate was last raised by 25 bps to three in May 2023.

“A rate cut in July would allow BNM to adopt a more pre-emptive policy stance, particularly in light of persistent external headwinds and moderating domestic economic activities,” said CIMB economists.

If BNM chooses to maintain the current rate, it could signal the central bank's desire to await additional data before adjusting its policy, they said. Such data include the second-quarter gross domestic product (GDP) and June trade numbers, both due on July 18, and July trade data, expected on Aug 18.

In the meantime, regional central banks in Thailand and Indonesia have already cut rates by a cumulative 50 basis points to ease monetary conditions.

Malaysia's exports contracted 1.1% year on year in May, a sharp reversal from the 16.4% jump recorded in April, which was driven by front-loading activities. While E&E exports remained positive, growing 7% y-o-y, CIMB economists observed that the segment is showing signs of waning momentum.

Meanwhile, non-E&E exports shrank by 6.3%, with declines in shipments to key regional markets such as China and Asean. Persistent tariff uncertainties, weak global demand and softening trade sentiment were cited as significant drags.

The downtrend is underscored by S&P Global's PMI for Malaysia, which gauges manufacturing conditions here. The index dropped to 49.3 in June, indicating slowing demand for new export orders.

In the meantime, overall credit growth slowed, driven by a deceleration in household loans and business loans. Softening private consumption is more evident, with retail trade growth slipping to a 15-month low of 4.7%, while motor vehicle sales rose by only 2.1% — significantly down from 6.8% last year.

The only bright spot was resilient credit card spending, which saw 9.1% growth. This implies that some consumers are still willing to spend on short-term or non-essential goods such as dining, travel or entertainment.