Research firm expects OPR to be slashed to 1 pct

Business research firm Fitch Solutions has forecast that Bank Negara will slash the Overnight Policy Rate (OPR) to 1 percent to spur the economy.

"The fiscal limitations of the government are... still in effect, leaving monetary policy as the key tool for the authorities to support growth," said the firm in its latest report.

This forecast was made despite Bank Negara adopting a dovish tone when it announced on Tuesday that it was lowering the OPR to 1.75 percent from 2 percent.

This marked the fourth 0.25 percent reduction since January.

The latest OPR was even lower than the levels seen during the global financial crisis in 2008.

Fitch Solutions said it expected Putrajaya to reach for monetary policy to support the economy because the government will be hard-pressed to implement fiscal easing.

Typically, lowering the OPR would result in cheaper loans which would encourage borrowings and allow consumers more disposable income.

However, slashing OPR rates would typically cause inflationary fears, which Fitch Solutions said was unlikely as weak domestic and international demand would likely cause disinflation or even deflation as the year progresses.

"Overall demand is likely to remain poor as the slower economy weighs on disposable incomes, keeping upward price pressures further in check," it added.

However, the firm tempered its forecast by stating that it was subject to upside risks and that Bank Negara may opt to preserve some policy space in anticipation of further economic shocks.