BNM cut the OPR by 25bps in July 20 MPC meeting, bringing it below the GFC low of 2.0%. While we had anticipated the 25bps cut in 2H20, the timing of the reduction was earlier-than-expected. Despite the expectation of gradual improvement in Malaysia’s growth prospects, the pace and strength of the recovery remain subject to downside risks emanating from domestic and external factors. 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 as early as September MPC meeting to bring it to 1.50%.

DATA HIGHLIGHTS

On the global front, the MPC noted that global economic conditions is severe with global growth projected to be negative for the year. Although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward. While financial conditions have improved, risk aversion remains elevated. Downside risks to global outlook remain, especially if a resurgence of pandemic necessitates the reintroduction of containment measures.

On the domestic front, economic activity is expected to contract sharply in 2Q20. Since May 20, the gradual reopening of the economy, fiscal stimulus packages, monetary and financial measures will continue to underpin the improving economic outlook, supported further by projected recovery in global growth conditions. Nevertheless, MPC sounded cautious on the pace and strength of the recovery as it feels the economy remains subject to downside risks emanating from domestic and external factors. These include the prospects of further outbreaks of pandemic, more persistent weakness in labour market conditions and weaker-than-expected recovery in global growth.

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. However, MPC assessed the risk of broad-based and persistent decline in prices to be limited. Nevertheless, the inflation outlook remains dependent on global oil and commodity prices. Underlying inflation is also expected to be subdued.

HLIB’s VIEW

In the statement, MPC stated that the impact of Covid-19 on the global economy is severe. In line with this assessment, IMF had recently downgraded global growth to - 4.9% YoY, significantly below the projection in April 20 (-3.0% YoY). IMF explained that the downgrade reflected the realisation that Covid-19 has had a more severe impact on activity in 1H 20 than previously anticipated and the recovery in 2H20 is projected to be more gradual. While MPC expects the trough to be in 2Q20, several developments have also cast doubts on the strength and sustainability of the recovery. Globally, countries that opened the economies had to re-impose lockdowns in certain areas as the rate of infection rose. This will lead to downward pressure on global demand and supply conditions, limiting the strength of global recovery. On the local front, while policy measures have mitigated the negative impact of Covid-19, these measures (loan moratorium and wage subsidy) will lapse in Oct 20, putting downside risks on the recovery. Consequently, the sluggish and uncertain growth prospects could inflict further job losses and hold off investment plans. MPC stated that the reduction in OPR provide additional policy stimulus to accelerate the pace of economic recovery. Going forward, the MPC will continue to assess evolving conditions and utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery. Consequently, we think it is possible for BNM to reduce the OPR by another 25bps, as early as September MPC meeting to bring it to 1.50%

Source: Hong Leong Investment Bank Research - 8 Jul 2020