BNM maintained the OPR at 1.75% in the May 2021 MPC meeting. The committee expects vaccine roll-out and policy support in major economies to aid in global economic recovery, but assessed that risks remain tilted to the downside. Hence, while they consider the current monetary policy stance to be appropriate and accommodative, they reiterated that it will continue to be determined by new data and information given the fluidity of developments 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 expect the MPC to maintain the OPR at 1.75% in 2021.

DATA HIGHLIGHTS

BNM maintained the OPR at 1.75% in the May 2021 MPC meeting. The MPC noted that global economic recovery continued to strengthen, albeit at an uneven pace across countries. The recovery will be facilitated by ongoing roll-out of vaccination programmes, alongside policy support. While they noted that recent financial market volatility has somewhat receded, they acknowledged that this risk could potentially resurface. Coupled with ongoing uncertainty surrounding the pandemic, these factors tilt the balance of risks to the growth outlook to the downside.

On the domestic front, the committee expects the recent re-imposition of MCO 3.0 to have a less severe impact on economic activity in the short term as almost all economic sectors are allowed to operate. They continue to see an improved growth trajectory driven by stronger recovery in global demand and higher spending amid continued support from policy measures. The MPC also expects sentiment to improve as the domestic vaccination programme progresses. Nevertheless, they do not discount the possibility of disruptions to the vaccine roll-out both globally and domestically.

The MPC expects inflation to average higher in 2021, ranging between 2.5% YoY - 4.0% YoY, owing to cost-push factor of higher global oil prices. Inflation is expected to temporarily 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 muted between 0.5% YoY – 1.5% YoY, 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 fluidity of developments 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, vaccination prospects are expected to improve following the resumption of Johnson & Johnson’s vaccine roll-out in US and Europe, as health regulators cited benefits continue to outweigh the risk of administering the vaccine. Domestically, continued progress of National Immunisation Programme could lift business and consumer sentiment, thus improving growth prospects in 2Q21 onwards. As of 5th May, 6.3% of the targeted population have received at least 1 dose of Covid- 19 vaccine. Hence, with better growth prospects and expected spike in inflation trend in 2Q21, we expect the MPC to maintain OPR at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 7 May 2021