As forecasted, BNM maintained the OPR at 1.75% in the Jan 2021 MPC meeting. The committee noted that the global roll-out of vaccines is expected to lift growth prospects going forward. Nevertheless, they cautioned that the overall outlook is subject to downside risks from ongoing uncertainties surrounding the pandemic and vaccination programme. Hence, while BNM noted that the current monetary policy stance is appropriate and accommodative, they also noted that given the uncertainties surrounding the pandemic, the stance of monetary policy will be determined by new data and information. Hence, while we maintain our forecast for MPC to remain on hold at 1.75% in 2021, we do not rule out the possibility for another rate cut should economic conditions worsen (e.g. MCO 2.0 gets extended beyond Feb 21 or delay in global vaccine roll-out).

DATA HIGHLIGHTS

BNM maintained the OPR at 1.75% in the Jan 2021 MPC meeting. While MPC acknowledged the recent resurgences of Covid-19 cases and containment impact on the economy, it expects the roll-out of mass vaccination programmes and ongoing policy support to lift global growth prospects going forward. Nevertheless, the outlook is still subject to downside risks, primarily from more widespread virus transmissions and delays in vaccine administrations.

Domestically, the MPC noted that targeted containment measures have affected the recovery momentum in 4Q20, and now expects 2020 GDP to sit at the lower end of its forecasted range of -3.5% to -5.5% (HLIB: -5.5% YoY). For 2021, the committee acknowledged that the impact from the re-introduction of MCO 2.0 to near-term growth will be less severe than that of MCO 1.0 (MOF projects: RM600mn/day in MCO 2.0; MCO 1.0: RM2.4bn/day) with growth trajectory expected to improve in 2Q21 onwards. This is expected to be driven by the recovery in global demand, turnaround in spending amid continued policy support measures. In addition, the MPC expects the roll-out of vaccines in the coming months to improve sentiment, but cautioned there could be some hiccups along the way.

The MPC expects inflation to average higher in 2021 owing to improved global oil prices. Underlying inflation is projected to remain subdued amid continued spare capacity in the economy.

Meanwhile, as part of BNM’s effort to ensure sufficient liquidity in the financial system, BNM has announced an extension on banking institutions’ flexibility to fully recognise MGS and MGII to meet SRR compliance until 31 Dec 2022, from 31 May 2021 previously.

HLIB’s VIEW

Despite latest global and domestic developments, the Committee considers the current stance of monetary policy to be appropriate and accommodative. This could be due to the Committee’s forecast of lower negative impact of MCO 2.0 compared to MCO 1.0, expectations of vaccine-led global recovery going forward and assumption that Malaysia’s GDP would improve from 2Q21 onwards. Nevertheless, the Committee noted that given the uncertainties surrounding the pandemic, the stance of monetary policy will be determined by new data and information, and their implication on overall outlook for domestic growth and inflation. Hence, while we maintain our forecast for MPC to remain on hold at 1.75% in 2021, we do not rule out the possibility of another rate cut should economic conditions worsen (e.g. MCO 2.0 gets extended beyond Feb 2021 or delay in global vaccine roll-out)

Source: Hong Leong Investment Bank Research - 21 Jan 2021