BNM kept the overnight policy rate (OPR) at 1.75% at its Monetary Policy Committee (MPC) meeting yesterday.

The current interest rate is sufficient to accommodate the economy. Any further reduction in interest rates is unlikely to help stimulate the economy.

The OPR is poised to stay unchanged throughout the year and most likely into 2H21. Any decision to change the OPR will be influenced by new data and information, and the implications on the overall outlook for inflation and domestic growth.

A. Highlights

• BNM kept the overnight policy rate (OPR) at 1.75% at its Monetary Policy Committee (MPC) meeting yesterday.

• Hence, the OPR has been reduced by a cumulative 125 basis points since January 2020 to fuel economic growth.

• The decision fell in line with our and consensus expectations. This is despite better-than-expected economic activitiesin 1Q21 which continued into April, and reflected by data like exports, retail spending and labour market conditions.

• However, the reimposition of nationwide containment measures to curb the resurgence in Covid-19 cases will dampen growth momentum. Much depends on the stringency and duration of containment measures.

B. Key Takeaways

• The current interest rate is sufficient to accommodate the economy. Any further reduction in interest rates is unlikely to help stimulate the economy.

• Meanwhile, upwards inflationary pressure remains, driven by cost pressures due to supply disruptions from the tighter restrictions to contain the pandemic.

• Inflation is expected to remain as transitory. The recent spike was due to a low base and is projected to moderate in the near term as this base effect dissipates. For the full year of 2021, inflation is expected to be around 3.0%.

• The economic outlook depends on the speed and pace of the relaxation of containment measures, progress of the domestic vaccination programme, the strength in external demand and also the political environment. For 2021, the GDP outlook is between 4.0% and 4.5%.

• The OPR is poised to stay unchanged throughout the year and most likely into 2H21. Any decision to change the OPR will be influenced by new data and information, and the implications on the overall outlook for inflation and domestic growth.

Source: AmInvest Research - 9 Jul 2021