BNM maintained the OPR at 1.75% in the Mar 2021 MPC meeting. The committee expects vaccine roll-out and policy support to aid in global economic recovery, but opine that risks to the overall outlook are still tilted to the downside, albeit slightly diminished. Hence, while they view that the current monetary policy stance is appropriate and accommodative, they reiterated that the stance of monetary policy will continue to be determined by new data and information given the uncertainties surrounding the pandemic. Nevertheless, with improved global and domestic vaccination prospects, better GDP performance in 2Q21 onwards and spike in inflation trend in 2Q21, we now expect the MPC to stand pat and maintain the OPR at 1.75% in 2021.

DATA HIGHLIGHTS

BNM maintained the OPR at 1.75% in the Mar 2021 MPC meeting. The MPC noted that global economic recovery is gaining traction and will be further supported by ongoing roll-out of vaccination programmes in many economies, alongside policy support. While they acknowledged that the risks to the growth outlook have abated slightly, they are still tilted to the downside, stemming from ongoing uncertainties surrounding the pandemic and effectiveness of vaccination programmes.

On the domestic front, the committee expects the impact to growth from MCO2.0 in 1Q21 to be less severe than that experienced in 2Q20. According to MOF, the reopening of more economic sectors under the second phase of MCO2.0 has reduced the country’s losses to RM0.3bn/day (phase 1 of MCO2.0: RM0.6bn/day; MCO1.0: RM2.4bn/day). Improvements to growth is expected from 2Q21 onwards, driven by the recovery on global demand and higher spending amid continued support from policy measures and more targeted containment measures. The MPC also expects sentiment to improve with the roll-out of domestic vaccination programme, but still cautioned there could be some hiccups along the way.

The MPC expects inflation to average higher in 2021 owing to improved global oil prices. Inflation is expected to spike in 2Q21 due to low base effect from low domestic retail fuel prices in 2Q20, before moderating thereafter. Underlying inflation is projected to remain subdued amid continued spare capacity in the economy.

HLIB’s VIEW

The MPC considers the current stance of monetary policy to be appropriate and accommodative. Nevertheless, given the uncertainties surrounding the pandemic, the stance of monetary policy will continue to be determined by new data and information, and their implication on overall outlook for domestic growth and inflation. On the global front, economic recovery is anticipated to be driven by improvement in vaccination progress alongside additional policy support measures. Recent approval by the US FDA for Johnson & Johnson’s single-shot vaccine could also improve vaccination prospects further. For Malaysia, the kick-off of the National Covid-19 Immunisation Programme, recent conditional approval for the use of AstraZeneca and Sinovac vaccines and expected arrival of AstraZeneca vaccines in 2Q21 could lead to improved business and consumer sentiment, thus improving growth prospects in 2Q21 onwards. Hence, with better growth prospects and expected spike in inflation trend in 2Q21, we now expect the MPC to stand pat and maintain OPR at 1.75% in 2021 (previously: 25bps cut in 1H21).

Source: Hong Leong Investment Bank Research - 5 Mar 2021