Banking Sector - Interest rate likely to remain unchanged OVERWEIGHT

- The press reported Bank Negara Malaysia (BNM)’s governor as hinting that Malaysia is not reducing interest rates at the next monetary policy committee meeting (MPC) as domestic demand is strong and robust, unless exports growth decline sharply. 

- The governor said that BNM is monitoring the conditions closely. The governor added BNM will need to balance this because domestic demand comprising of consumption is growing at 7%, investment at over 10% and loan growth is also strong. The regulator further hinted that all these factors will be taken into consideration. 

- This is in line with our view that interest rates will be unchanged going forward.

- The next monetary policy committee (MPC) meeting is scheduled on 5 July.  MPC has maintained key benchmark interest rates or the Overnight Policy Rate (OPC) unchanged at 3.0% for the sixth consecutive meeting, citing that domestic demand had continued support growth, driven by firm consumption and investment activity, and adding that this trend is expected to continue. 

- Elsewhere, Bank Indonesia (BI) has left its key interest rates unchanged at a record low of 5.75% yesterday, as expected. Indonesia last reduced rate by 25bps to 5.75% on 12 January 2012. Prior to this, Indonesia had cut rates by 25bps to 6.50% from 6.75% on 11 October 2011, and subsequently by 50bps to 6.00% from 6.50% on 10 November 2011.     

- Before this, the Reserve Bank of Australia (RBA) has cut its cash rate by 25bp on 5 June 2012, marking the second consecutive month of monthly reduction. This came following May’s surprise 50bps reduction. 

- Australia’s key lending rate has now been reduced to 3.5% from 3.75%, the lowest level since November 2009. The previous cuts were 25bps in November 2011 and 25bps in December 2011, taking the cash rate down from recent peak of 4.75%. This would be the fourth rate cut since November 2011. 

- China had also reduced interest rates on 6 June 2012 by 25bps, the first rate cut since mid-2011. This takes the benchmark interest rate to 6.31%.   

- With no reduction in interest rates for Malaysia for now, this is positive in terms of lesser compression in net interest margin (NIM). We maintain our overweight stance on the sector.    

Source: AmeSecurities