As forecasted, BNM maintained the OPR at 1.75% in the Sep 2021 MPC meeting. The tone of MPC was neutral as they assessed that recovery is underway in the global and domestic economy. Nevertheless, they noted that risks to the outlook remain tilted to the downside, stemming mainly from emergence of variants of concern and weaker-than-expected global growth recovery. The MPC reiterated that the monetary policy stance remains appropriate and accommodative, in addition to the various fiscal and financial measures rolled out to support economic activity. We expect MPC to maintain OPR at 1.75% for the year, premised on expectation of improved domestic vaccination progress and continued global economic recovery.

DATA HIGHLIGHTS

As forecasted, BNM maintained the OPR at 1.75% in the Sep 2021 MPC meeting. On the global front, the MPC noted that the strength of global economic recovery has been varied according to countries’ vaccination coverage, degree of relaxation of containment measures as well as policy support. These economies with better vaccination progress have enabled a continued recovery in domestic activity. Nevertheless, the path of the pandemic remains uncertain with the emergence of variants of concern. While the committee noted that financial conditions remain supportive of growth, they viewed there to be a potential risk of heightened financial market volatility amid monetary policy adjustments in major economies.

The re-imposition of nationwide containment measures has dampened the domestic growth momentum. However, the MPC acknowledged that the announcement of more economic freedoms, higher adaptability to remote work and continued policy support measures (e.g., Bantuan Khas Covid-19, EPF withdrawals, opt-in loan moratorium) should provide some cushion against the effects of containment measures. Further easing of these measures as more states transition to later phases of the National Recovery Plan (NRP), alongside rapid vaccination progress and favourable global demand conditions will bode well for the growth outlook. However, the MPC viewed that the balance of risks is still tilted to the downside should the global recovery be weaker-than-expected. New variants of concern could also delay the domestic reopening timeline. BNM projects GDP to range between 3.0%–4.0% in 2021 (previous: 6.0%–7.5%).

Inflation is projected to average lower between 2.0%–3.0% for 2021 (previous: 2.5%– 4.0%). Underlying inflation is projected to remain muted between 0.5%–1.5% amid continued spare capacity in the economy.

HLIB’s VIEW

The MPC reiterated that the current monetary policy stance is appropriate and accommodative, in addition to the various fiscal and financial measures rolled out to support economic activity. Continued expansion in global demand, especially from advanced economies, is anticipated to support the domestic growth momentum. Domestically, Klang Valley will move to Phase 2 on 10th Sep, leaving only Johor and Kedah in Phase 1. While the transition of more states out of Phase 1 of the NRP augurs well for the growth outlook, this could also bring about heightened risks of transmission and a pushback of the domestic economic reopening timeline. We maintain our expectation for OPR to be maintained at 1.75% in 2021, premised on expectation of improved domestic vaccination progress and continued global economic recovery.

Source: Hong Leong Investment Bank Research - 10 Sept 2021