I followed your repro steps above, however, you do not mention to delete the original “Test” folder after moving the material to, in my case, the “Test2” folder so, of course, “Test” folder does still exist upon re-opening the editor. At this point I deleted “Test” folder, closed the Editor and re-opened it. Now the original “Test” folder does not appear. Instead, only “Test2” containing the material “Test_Mat” remains. Tested with an empty blueprint project.
Result: Works as expected.
If you can update your steps and fill in areas I might have missed like, Is it a Third Person Blueprint Project? Does it have to have Starter Content? etc. I will retest and enter a bug report accordingly.
*Be sure you are testing in the latest preview version of UE4.14 (Preview 3)