The latest decision by BNM to hold the policy rate unchanged is mostly within expectations. This decision indicates that the outlook of the OPR going forward will continue to be evidence based. This would mean for the next two quarters, the 1.75% level is likely to be kept intact.

With the global and domestic economic outlook’s solid rebound on the plate, while acknowledging downside risk, this points to the question of inflation expectations. Evidence of upwards pressure on potential inflation coming from demand and cost will open the door for talks on policy normalisation. It is more likely to happen in 4Q2021. Extrapolating the current set of data, the preliminary indication points to a 30% chance of a rate hike in 4Q2021 with a 70% probability of the rate remaining at 1.75%. But this assessment could change as more actual data is factored in as we go forward.

• Apart from a 25bps cut by Bank of Indonesia in February to 3.50%, most central banks left their policy rate unchanged thus far this year. On that note, BNM, as expected, left their policy rate unchanged for the second consecutive MPC meeting at 1.75%, where 18 economists out of 23 predicted no rate cut.

• The decision to leave the OPR unchanged is supported by improving optimism over the global and domestic economic recovery. The deployment of vaccines, expectations of better management of the pandemic virus spread, improving global trade, firmer commodity prices, a pick-up in global semiconductors, contribution from primary-related exports, stimulus measures and improving consumer sentiment and business confidence are all pointing towards a rebound. The outlook for Malaysia’s GDP for 2021 is be around 5.2%–5.9%, as 1Q2021 would be weighed down by the MCO 2.0.

• The potential direction of the OPR will continue to be evidence-based i.e. data driven. That would mean the monetary policy will remain accommodative for the rest of the year. With downside risk still remains, both external and domestic, the OPR is more likely to remain at 1.75% for the next two quarters.

• Talks on policy rate normalisation could start to creep up in the final quarter of 2021. Much will now depend on the potential inflow of the macro data. Should the data points to an upward potential inflationary pressures driven by both demand and cost, it will put BNM in the spot light with little room to continue holding the current 1.75%.

• Extrapolating the current set of data, the preliminary indication points to a 30% chance of a rate hike in 4Q2021 with 70% probability of the rate remaining at 1.75%. But this assessment could change as more actual data is factored in as we go forward.

Source: AmInvest Research - 5 Mar 2021