BNM maintained the OPR at 1.75% in Sep 2020 MPC meeting. The committee noted there was improvement in economic activity on the global and domestic front, while also cautioned that growth outlook remain subject to significant downside risks stemming from uncertainties surrounding the developments of the pandemic and weak labour market conditions. BNM noted that the current monetary policy stance is appropriate and accommodative given the subdued outlook for growth and inflation. Hence, we do not foresee any cuts to OPR for the rest of 2020 unless conditions worsen significantly.

DATA HIGHLIGHTS

The tone of the MPC was neutral as members expect an economic recovery while acknowledging outlook is still subject to downside risks and uncertainty. Positive policy actions and easing of virus containment measures have led to an improvement in the global economy. Production facilities have re-opened, leading to a resumption of manufacturing and trade activity. The services sector has also begun to recover, albeit at a slower pace, possibly due to social distancing rules that are still in place. While financial conditions have improved, risk aversion remains elevated. The MPC noted that uncertainty and downside risks to global outlook remain, especially if a resurgence of the pandemic results in reintroduction of containment measures and exacerbates weakness in labour market conditions.

On the domestic front, the MPC noted that economic activity continues to recover from the trough in Apr 2020. Latest indicators on labour, trade and household spending front have continued to improve under the Recovery MCO, while fiscal stimulus packages, monetary and financial measures also lent additional support to the recovery. As at 28th Aug, one-off cash assistance amounted to RM14.7bn (1.6% of private consumption), while the wage subsidy scheme benefitted 2.62m employees (16.6% of labour force). The MPC anticipates the improvement in economic activity to continue into 2021 (+5.5% YoY to +8.0% YoY), supported by recovery in external demand and expansion in private sector expenditure. Nevertheless, the MPC cautioned that the pace of recovery will be uneven across sectors and that the labour market may experience a slower-than-expected improvement. They also opined that Malaysia’s growth outlook remains fraught with uncertainty surrounding the developments of the pandemic domestically and globally.

The MPC expects inflation to average negative in 2020, within the -1.5% to +0.5% range, following substantially lower global oil prices, before averaging higher in 2021 (+1.0% YoY to +3.0% YoY). Inflation prospects will continue to be affected by the trajectory of global oil and commodity prices. Meanwhile, underlying inflation is expected to be subdued amid spare capacity in the economy.

HLIB’s VIEW

At the start of 3Q 2020, there have been early signs of recovery in global and domestic economic activity. While there may be some downside risks in 4Q 2020 due to lapse of policy measures such as wage subsidy scheme, automatic loan moratorium and possible resurgence in virus cases, BNM seems confident that economic activity will be able to weather it through. Consistent with this, BNM noted that given the outlook for growth and inflation, current monetary policy stance is appropriate and accommodative, following reduction of OPR by cumulative 125bps. Hence, we do not foresee any additional cuts to OPR for the rest of 2020 unless conditions worsen significantly.

Source: Hong Leong Investment Bank Research - 11 Sept 2020