As forecasted, BNM maintained the OPR at 1.75%. The committee expects global economic recovery to be lifted by better vaccination progress and policy support, but assessed that risks remain tilted to the downside. For Malaysia, they acknowledged that the reimposition of FMCO will dampen the growth momentum and viewed that any delay or tightening of lockdown measures would pose significant downside risks to the outlook. While this signals that BNM could be prepared to cut the rate further should economic situation worsen significantly, for now, we expect MPC to maintain OPR at 1.75% in 2021, premised on expectation of improved domestic vaccination progress and continued global economic recovery. In addition to existing low interest rates, the government also continues to lend support to the economy through other measures such as opt-in loan moratorium, extra cash handouts and extension of Wage Subsidy Programme.

DATA HIGHLIGHTS

As forecasted, BNM maintained the OPR at 1.75% in the July 2021 MPC meeting. The MPC noted that global economic recovery continued to strengthen, mostly led by advanced economies owing to better vaccination progress which enabled a quicker recovery in domestic activity. However, they also noted that activities in some economies were disrupted by tighter measures to curb Covid-19 resurgences. Thus, the path of the pandemic remains uncertain. Alongside potential risks of heightened financial market volatility, these factors continue to pose downside risks to the global growth outlook.

On the domestic front, the committee acknowledged that the reimposition of FMCO will dampen the growth momentum, with the magnitude of impact largely dependent on the stringency and duration of lockdown measures. While they do see some cushioning of impact through continued allowances for essential economic sectors to operate, higher adaptability to remote work and various policy support measures (e.g., opt-in loan moratorium, extra cash handouts and extension of Wage Subsidy Programme, EPF withdrawals), they viewed that any delay or tightening of lockdown measures would pose significant downside risks to the growth outlook.

The MPC expects inflation to average closer to the lower bound of the forecast range in 2021 (2.5% YoY – 4.0% YoY) as the spike in headline inflation eases in the latter half of the year. 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 monetary policy stance 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. The faster pace of vaccination progress in advanced economies has led to favourable external demand conditions which are anticipated to support the economy. Nevertheless, due to uncertainty on Malaysia’s Covid-19 situation, we do not rule out another OPR cut but for now, we maintain our expectation for it to be maintained at 1.75% in 2021, premised on expectation of improved domestic vaccination progress and continued global economic recovery. Vaccine coordinating minister Khairy Jamaluddin targets daily vaccinations to ramp up from June’s average of 169k to 390k doses in July (of which Selangor: 136k; Jun avg: 28,146) and 434k in August. In addition to existing low interest rates, the government also continues to lend support to the economy through measures such as opt-in loan moratorium, extra cash handouts and extension of Wage Subsidy Programme.

Source: Hong Leong Investment Bank Research - 9 Jul 2021