• OPR stay put at 1.75%
• BNM: Weaker global growth, supply chain logjams risk to growth
• Headline inflation to average within the projected range of 2%-3% whilst core inflation is expected to average below 1.0% for 2021
• Interest rates to remain on hold until 1H22

Bank Negara Malaysia (BNM) kept its benchmark interest rate at a historical low as economic growth risks remain tilted to the downside, though there have been some signs of recovery. The Monetary Policy Committee (MPC) decided to maintain the overnight policy rate (OPR) at 1.75% during the MPC’s final 2021 meeting. The central bank has stood pat since July last year, when it cut the rate to support the economy as the country impose movement restrictions to curb the spread of COVID-19.

Malaysia has been easing restrictions since September with 95.7% of the country's adult population now fully vaccinated. Loosened movement restrictions will stimulate domestic demand going forward, and external demand already appears to be recovering after a heavier than-expected downturn in July, which should improve Malaysia’s economic outlook. Malaysia’s high-frequency indicators suggest the economy is headed for a turnaround this quarter after what looks to be another sequential contraction in 3Q. Activity has picked up sharply as progress in virus control and vaccinations allowed strict curbs to be eased. Oil prices have also soared, which will boost export receipts and confidence more broadly.

The MPC decided to maintain the OPR at 1.75% after taking into account that risks to Malaysia’s economic growth outlook. The accompanying statement was dovish, with BNM stating that it is still “committed to utilise policy levers” to support the economic recovery, that the risks to the outlook “remain tilted to the downside”, and that the stance of monetary policy is “appropriate and accommodative”.

Globally, BNM said that although the global economy remains on a recovery path, driven by expansion in manufacturing and services activity, the balance of risks to global economic growth outlook also remains tilted to the downside. This is attributed mainly to uncertainties surrounding the emergence of COVID-19 variants of concern, the risk of more prolonged global supply-chain disruptions and potential risk of heightened financial market volatility amid adjustments to monetary policy in major economies.

In the MPC statement, BNM said that risks to Malaysia’s economic growth outlook include weaker-than-expected global economic growth, worsening supply-chain disruptions and the reimposition of containment measures due to the impact of new COVID-19 variants of concern.

Malaysia’s economy is beginning to rebound after a year spent under tight lockdown conditions. BNM said that "Going into 2022, the growth momentum is expected to improve, supported by expansion in global demand, higher private-sector expenditure in line with the resumption of economic activity and continued policy support. Risks to the growth outlook, however, remain tilted to the downside due to external and domestic factors”.

On the price front, Bank Negara said headline inflation is likely to average between 2.0% and 3.0% for 2021, having averaged 2.3% year-to-date. Headline inflation is expected to remain moderate in 2022. As economic activity normalizes, core inflation, which is tipped to average below 1.0% this year, is expected to edge upward but remain benign given continued spare capacity in the economy and slack in the labor market. “The outlook, however, continues to be subject to global commodity price developments and some risk from prolonged supplyrelated disruptions”.

The central bank said the MPC considered the stance of the bank's monetary policy to be appropriate and accommodative. In addition, Malaysia’s fiscal and financial measures will continue to cushion the economic impact on businesses and households and provide support to economic activity. “Given the uncertainties surrounding the pandemic, the stance of monetary policy will continue to be determined by new data and information and their implications on the overall outlook for inflation and domestic growth”.

The meeting also approved the schedule of MPC meetings for 2022. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year.

Interest rates to remain on hold until 1H22

BNM kept its stance of the bank's monetary policy to be appropriate and accommodative to support the nascent economic recovery, such that the upswing is not derailed. BNM will instead monitor growth prospects and macroeconomic data as we head towards the year-end. Economic activity should start to turn around as economic conditions improve, supported by easy policy.

However, the authorities are likely to begin considering policy normalisation in 2022. The timing of the hike will be contingent on the pace of economic recovery, and our expectations are for BNM to raise its policy rate by 25bps in 2H2022. Core inflation has been benign, providing room for loose policy, but is likely to inch higher gradually, as existing economic slack is reduced. Authorities have so far looked through the pick-up in headline inflation driven by shifts in energy prices.

Furthermore, as several major central banks have begun their rate hike cycle, amid sustained economic growth and heightened inflationary pressure, we reckon BNM may withhold from any further monetary easing in 1H22. Given that the US Fed has increasingly indicated that it would begin raising its short-term rate in 2022, as opposed to 2023, we believe BNM may raise the OPR by 2H22 in a pre-emptive move. That said, any tightening is likely to be gradual and less aggressive, compared to the post-GFC normalisation cycle, as uncertainty is elevated and the economy is not out of the woods yet.

Source: BIMB Securities Research - 3 Nov 2021