BNM cut OPR by 50bps in May 2020 MPC meeting amid significantly weaker global economic conditions due to the Covid-19 outbreak. Domestically, the Committee expects economic conditions to be particularly challenging in 1H20 as virus containment measures adversely impact economic activity and labour market conditions. While they foresee gradual improvement in economic activity under the Conditional Movement Control Order (MCO), the growth outlook remains highly uncertain and dependent on developments surrounding the pandemic. We do not rule out another 25bps cut should economic conditions continue to worsen for longer than expected.

DATA HIGHLIGHTS

On the global front, the MPC noted that global economic conditions have weakened significantly. Most economies have enforced Covid-19 containment measures resulting in large scale disruptions in economic activity. The highly uncertain environment and elevated risk aversion has also led to tighter financial market conditions. Nevertheless, the MPC opines that substantial policy stimuli alongside gradual easing of containment measures globally are expected to partially mitigate the impact of Covid-19, with improved growth prospects next year, in 2021.

On the domestic front, Malaysia was not spared from the effects of the pandemic. The weak external environment following global lockdown measures and international border closures are expected to exert a larger drag on domestic economic activity. The MPC noted that while necessary, the MCO has constrained production capacity and spending. The committee also expected the labour market to weaken considerably. While they expect economic conditions to be particularly challenging in 1H20, it will be partly supported by the fiscal and monetary stimulus measures announced. BNM noted that economic activity is expected to gradually improve as more businesses are allowed to operate under the CMCO. Nevertheless, the growth prospect remains highly uncertain and largely dependent on developments surrounding the pandemic.

The MPC expected inflation to be muted in 2020, with average headline inflation likely to record a negative print for the year, due mainly to substantially lower global oil price projections. The inflation outlook remains dependent on global oil and commodity prices, as well as evolving demand conditions. Underlying inflation is also expected to be subdued.

Meanwhile, on the financial sector, the MPC noted that the financial sector is sound, with financial institutions operating with ample capital and liquidity buffers. BNM has also announced increased flexibility for banking institutions to fully recognise MGS and MGII to meet SRR compliance effective 16 May 2020 to 31 May 2021. This measure is expected to release RM16bn of liquidity into the banking system. This measure was previously accorded to principal dealers to recognise MGS and MGII of up to RM1bn as part of SRR compliance.

HLIB’s VIEW

The OPR cut to 2.00% was largely anticipated and complements other financial, monetary and fiscal measures announced this year to cushion the negative economic impact of Covid-19. This is also the same rate reached during the Global Financial Crisis. Nevertheless, should economic conditions deteriorate for longer than expected, we opine that BNM still has sufficient room for further easing amid muted inflationary pressures and uncertain growth outlook. Consequently, as economic activity is expected to remain weak and inflation prospects modest, we think it’s possible for BNM to reduce the OPR by another 25bps in 2H20 to bring it to 1.75%.

Source: Hong Leong Investment Bank Research - 6 May 2020