PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 2 Mar 2021, 9:39 AM


January 2021 Policy Decision - Accommodative Policy Continues

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January Policy Decision

The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has left the overnight policy rate (OPR) steady at its first policy meeting of the year, a move consistent with Emerging Market Economy (EME) peers like Turkey, India, China and Indonesia. There is enough room for another round of policy cut however, thanks to weak inflationary pressures. The decision to hold the policy status steady was driven, among others, by massive fiscal assistance following five COVID-19 fiscal stimulus programmes especially the wage subsidies and the extension of the loan repayment moratoriums for targeted groups (B40, M40). Growth will also be aided by the expansionary fiscal budget for 2021 that will see Development Expenditure (DE) receiving an almost-50% increase in allocation. Risks to growth may emanate from a longer-thanexpected movement restriction period, though there are sufficient drivers to bolster the economy and keep OPR status quo in 1H21.

Malaysia’s engine of growth continues to recover though this is being tempered by the reversion to the Movement Control Order (MCO) recently. Economic impact from the second round of MCO is expected to be contained however thanks to the decision to allow several key sectors to open especially agriculture, services and manufacturing though there could be minor hiccups due to some restrictions of the MCO. The decision to implement an improved version of MCO is also lauded as that will prevent a large dent to output that culminated in a sharp 17.1% YoY drop in economy in 2Q20.

Policy Outlook: Cautious Prospects

Malaysia growth prospects are expected to improve in 2021 thanks to massive fiscal assistance that will be rolled out fully this year. Five fiscal stimulus programmes worth more than 20% of GDP will see job sustainability that will help keep unemployment low. These five stimulus packages are also laden with pro-consumption and pro-investment initiatives that will push growth to rebound sharply. Growth will also be aided by accommodative interest rate environment which is expected to continue amid a rebound in inflation for the year that will be driven more by global cost-push factors, especially oil. Policy outlook going forward will, amongst others, also depend on the dynamics of the pandemic and challenges in rolling out the vaccination programme for COVID19 (if any).


The worse should almost be over with the recent COVID-19 vaccine breakthrough which underpins the government’s confidence in achieving herd immunity by 1Q22. This will slowly but surely boost consumer and business sentiment amid removal of the single largest drag to growth in the last one year. Massive fiscal and monetary stimulus measures in the last one year or so will be the drivers of growth this year. Expansionary growth strategy will be a precursor for consumption, investment and capital markets. More importantly however, employment will recover to drive output in 2021 to exceed pre-crisis levels. That said, we keep a wary eye on the prospective US-China 2nd trade talks which could begin as early as 1Q21. A prolonged period of negotiations will be negative for the economy amid uncertain conditions that could cause a pullback in manufacturing output and therefore, trade. This could also affect Foreign Direct Investments (FDI) given that investment in manufacturing pulled in a significant share of FDI prior to the 1st US-China trade tensions.

Source: PublicInvest Research - 21 Jan 2021

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