As forecasted, BNM maintained the OPR at 1.75% in the Nov 2020 MPC meeting. The committee noted that economic activity on the global and domestic front has improved, but also cautioned that growth outlook remains clouded by downside risks stemming mainly from ongoing uncertainties surrounding the pandemic. BNM noted that the current monetary policy stance is appropriate and accommodative given the subdued outlook for growth and inflation. In 2021, we maintain our expectation for OPR to remain at the current level unless conditions worsen significantly.

DATA HIGHLIGHTS

BNM maintained the OPR at 1.75% in the Nov 2020 MPC meeting. The tone of the MPC was neutral as members foresee an economic recovery while noting that the outlook is still subject to downside risks and uncertainty. Despite the pickup in economic activity in most advanced and regional economies, the MPC expects recovery to remain uneven in the near-term, as recent spikes in COVID-19 cases have led some major economies to reimpose containment measures. While financial conditions have improved, risk aversion remains elevated. The MPC also acknowledged that the global outlook remains subject to downside risks, mainly from further resurgence of infections which could lead to weaker business, employment and income conditions. On the domestic front, the MPC noted that economic activity will likely show significant improvement in 3Q20 based on latest indicators, although this momentum of recovery could be affected in 4Q20 owing to targeted MCO measures imposed to contain the virus spread in several states (Selangor, Kuala Lumpur, Putrajaya and Sabah make up 46.7% of Malaysia’s GDP). Nevertheless, the MPC still expects growth to be within range of -3.5% to -5.5% for 2020. In 2021, growth is expected to be within the +5.5% to +8.0% range, driven by recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, as well as higher production from existing and new facilities. However, the pace of recovery will be uneven across sectors, dragged by slower improvement in labour market conditions. They also cautioned that Malaysia’s growth outlook remains clouded by ongoing uncertainties surrounding developments of the pandemic on the global and domestic front. Given substantially lower global oil prices, the MPC continues to expect headline inflation to average negative this year, within the -1.5% to +0.5% range, 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 continued spare capacity in the economy.

HLIB’s VIEW

As forecasted, BNM maintained the OPR at 1.75% at today’s MPC meeting. Despite the renewed CMCO in targeted areas accounting for 46.7% of GDP (Sabah and Klang Valley), MPC noted 2020 GDP will be within the forecasted range and 2021 will see a rebound. While there has been an improvement in economic activity in 3Q 2020, the persistently high infection rate in Malaysia and resurgence in other major economies could result in lower growth momentum in 4Q 2020 globally and domestically. At this point, the MPC considers the stance of MP to be appropriate and accommodative. BNM said the cumulative 125 basis points reduction in the OPR this year will continue to provide stimulus to the economy. Consequently, we maintain our forecast for OPR to remain unchanged throughout 2021 unless conditions worsen significantly

Source: Hong Leong Investment Bank Research - 4 Nov 2020