• OPR stay put at 1.75%

• Growth outlook remains subject to significant downside risks

• Headline inflation is projected to moderate in the near term

• BNM set to hold OPR at 1.75% for the remainder of the year

Bank Negara Malaysia’s Monetary Policy Committee (MPC) kept the Overnight Policy Rate (OPR) unchanged at 1.75%, as expected, for a sixth straight meeting amid an extended nationwide lockdown imposed to contain a surge in COVID-19 infections. After a cumulative 125bps cut in the OPR last year to fuel economic growth, the current interest rate is sufficient to accommodate the economy. In addition, given the return of inflation, a reduction in OPR may not be favourable in dealing with price pressures in the coming months.

BNM also highlighted that its MPC considered the monetary policy stance to be appropriate and accommodative. In addition, fiscal and financial measures will continue to cushion the economic impact on businesses and households and provide support to economic activity. The bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

MPC’s decision came as BNM believes that all fiscal and financial measures unveiled to date will continue to cushion the impact of stricter nationwide lockdown imposed since mid-May on the economy amid positive progress on the national immunisation programme and further improvement in the global economy.

The MPC statement continued to portray a certain level of confidence in a sanguine growth outlook, noting supportive factors such as allowances for some essential economic sectors to operate. With downside risks to the near-term growth outlook associated with the stringency and duration of containment measures, Bank Negara noted in its MPC statement that growth remains “subject to significant downside risks, due mainly to factors that could lead to delay in the easing of containment measures or imposition of tighter containment measures”. The persistent strength in external demand is anticipated to provide further support for the growth recovery in 2H21 and into 2022.

As the bank expected, headline inflation had spiked recently due to the low base effect of fuel prices in the second quarter of last year, and the central bank is also seen to be not as concerned about the transitory inflationary pressure, which it projects to moderate in the near term as the base effect dissipates. BNM is now projecting headline inflation to average closer to the lower bound of its forecast range (2.5%-4.0%) this year, while underlying inflation is predicted to average at 0.5%-1.5% amid continued spare capacity in the economy. The outlook, however, is subject to volatile global commodity prices.

BNM set to hold OPR at 1.75% for the remainder of the year

BNM hold the OPR at 1.75% with policymakers sustaining positive upside to Malaysia’s growth outlook despite the short-term risks from still high COVID-19 nationwide daily infections. In medium to longer term horizon, spur to economic activity would come from improving global growth outlook and Malaysia’s accelerated vaccination program. Increased stimulus spending including latest stimulus package launched last month - PEMULIH package worth RM150bn brought cumulative assistance since 2020 to RM530bn that was announced over eight fiscal packages, including RM83bn in direct fiscal injection is also likely to aid Malaysia’s rebound.

With additional fiscal aids to cushion the impact of full lockdown, we expect BNM to monitor the fluid situation. The central bank is likely to leave its policy rate unchanged until the recovery in domestic demand is anchored. Hence, we maintain our view that BNM will keep the OPR on hold at 1.75% for the remainder of the year. BNM is expected to maintain an accommodative monetary policy stance as a surge in COVID-19 cases infections locally threatens the economic recovery. There have been signs of picking up in economy since business reopening but uncertainty for a quick recovery continues to cloud the economic outlook following resurgence of COVID-19 cases recently. The lockdown from 1st July in Selangor and certain localities in Kuala Lumpur - where new infections remain high - to contain the COVID-19 pandemic will continue to pose some downside risk to the overall recovery. That said, we are counting on economic stabilisation and growth to kick in more meaningfully in 2H21 when vaccination roll-outs are more successful.

Source: BIMB Securities Research - 9 Jul 2021