• OPR stay put at 1.75%
• Risks to the growth outlook remained tilted to the downside due to external and domestic factors
• Core inflation is expected to remain subdued
• BNM to stand pat on policy rate for the rest of 2021

Bank Negara Malaysia kept its benchmark interest rate at a record low, maintaining support for an economy that’s set to fully reopen in a matter of months. BNM’s Monetary Policy Committee (MPC) kept the Overnight Policy Rate (OPR) unchanged at 1.75%, as expected, for a seventh straight meeting, even though the economy has been weighed by over two months of restrictions to contain the spread of COVID-19. The rate was last adjusted following the July 7, 2020 MPC meeting, which saw a 25bps cut from 2% as at May 5, 2020. BNM stated that the risks to the growth outlook remained tilted to the downside due to external and domestic factors. The monetary policy committee noted the nationwide lockdowns restrictions dampened growth momentum, while the recent gradual relaxations to allow more sectors to operate coupled with continued policy support have mitigated the impact of the pandemic. Looking ahead, policymakers said that expanding global demand conditions, the reopening of economic activity and the vaccination drive will support growth. The central bank also highlighted that its MPC considered the monetary policy stance to be appropriate and accommodative.

The global economy continues to recover, supported by improvements in manufacturing and services activity. Overall, the balance of risks to the global growth outlook is tilted to the downside. These factors included delays in the easing of containment measures due to the impact of new COVID-19 variants of concern and a weaker-than-expected recovery in global growth.

For Malaysia, the reimposition of nationwide containment measures to curb the resurgence in COVID-19 cases had dampened the growth momentum, although the bank said the recent gradual relaxation for economic sectors to operate and the higher adaptability of firms to the new operating environment and continued policy support would partly mitigate the impact. BNM said the further easing of containment measures, rapid progress of the domestic vaccination programme and continued expansion in global demand will support the growth momentum going into 2022. Bank Negara noted in its MPC statement that “moving forward, the further easing of containment measures, rapid progress of the domestic vaccination program and continued expansion in global demand will support the growth momentum going into 2022”. While the bank’s economic view remained cautious, language on the outlook improved slightly, from “subject to significant downside risks” in July’s decision to “tilted to the downside”.

On the price front, the central bank added that headline inflation has averaged 2.3% this year and was set to range between 2% and 3% until the end of the year, although the outlook remained dependent on global commodity prices.

BNM to stand pat on policy rate for the rest of 2021

As previously stated by the BNM, the monetary policy settings are set to remain accommodative in the foreseeable future to provide support to the economy and to ensure that price pressures remain manageable.

Despite a faster than expected 16.1% yoy growth in 2Q21, BNM slashed 2021 GDP growth forecast to 3%-4% from its previous estimate of 6%-7.5%. The central bank alluded to the re-imposition of movement control order (MCO) as a key factor that would weigh on economic growth in 2H21. That being said, we expect the prolonged COVID-led disruption to alleviate towards year end as the gradual economic re-opening under National Recovery Plan (NRP) would revitalise economic activities, restore domestic consumption, business operations, exports and imports, and thereby underpin the recovery in 4Q21 and beyond. With an eventual economic recovery in sight, we opine that there is less incentive for BNM to tweak the OPR since the prevailing rate is appropriate to support the economy as it is already at an all-time low.

However, the central bank would need to observe the staunching of sequential declines in GDP, broader gains in inflation as well as improved labor market conditions. We do not anticipate upward pressure in global interest rates and bond yields as a result of policy shifts and inflation to materialize until next year, giving the space for BNM to take a patient approach for now.

The central bank still sees downside risks to the growth outlook despite the country’s significant vaccination progress. The latest proposal by Finance Minister to raise the statutory debt ceiling from 60% of GDP to 65% is a prelude to more fiscal stimulus to soften the economic impact of the latest COVID-19 wave. Consequently, monetary policy can continue to take a backstage given that the record low policy rate of 1.75% and an inflation rate of 2.2% leave the real rate in negative territory. Against this backdrop, we do not expect any more rate cuts, and expect BNM to maintain the OPR at 1.75% for the rest of 2021. Our base case remains that its next move will be a hike in 2022, if energy prices remain firm, vaccination progress continues, and reopening gathers momentum. We expect the OPR to follow the gentle upward drift in short-term interest rates and inflation expectations globally.

The likelihood of the Fed to begin unwinding its policy by the end of this year is also a factor that could drive Malaysia’s key rate higher in 2022. The Fed is a trend setter for global monetary policy and other central banks, including Bank Negara, may also be monitoring the Fed’s move. While BNM and other central bank’s policy may not move in lockstep with the Fed, the latter’s move will certainly set the stage for future policy responses. We opine that any increase will likely be gradual, and dependent on how soon the country’s economy recovers from the current downturn.

Source: BIMB Securities Research - 10 Sept 2021