As forecasted, BNM maintained the OPR at 1.75% in the Nov 2021 MPC meeting, leaving OPR unchanged for the full year. The tone of MPC was neutral as they assessed that the global and domestic economy is on a recovery path. Nevertheless, risks to the outlook remain tilted to the downside, with additional risk arising from global supply chain disruptions. 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 keep OPR unchanged until 1H22 and begin its upward normalisation process in the 2nd half.

DATA HIGHLIGHTS

As forecasted, BNM maintained the OPR at 1.75% in the Nov 2021 MPC meeting. On the global front, global demand has strengthened as economic activity continues to pick up. The surge in demand has brought about supply chain disruptions and drove commodity prices as well as overall inflation higher. While the committee expects global growth prospects to be supported by further vaccination progress, relaxation of containment measures and continued policy support, the balance of risks is still tilted to the downside. The committee has highlighted prolonged global supply chain disruptions as an additional risk, in addition to the uncertainty surrounding the emergence of new Covid-19 variants of concern and potential increase in financial market volatility.

The MPC shared that latest high frequency indicators showed a recovery from the trough in July, in line with the timeline of relaxation of restrictions (IPI Aug: -0.7% YoY; Jul: -5.1% YoY, unemployment rate Aug: 4.6%; Jul: 4.8%). The committee expects the growth momentum to improve going into 2022, supported by stronger global demand, higher private sector expenditure and continued policy support. However, the MPC opines that downside risks still persist, arising from worsening supply chain disruptions, weaker-than-expected global growth and new variants of concern. In terms of growth trajectory, official forecast projects GDP improve to 5.5%-6.5% in 2022 (2021: 3.0%-4.0%).

Headline inflation is still projected to average between 2.0%–3.0% in 2021 (Jan-Sep 2021: +2.3% YoY), and is expected to remain moderate in 2022 (official forecast: 2.1% YoY). Underlying inflation is projected to remain muted below 1.0% YoY in 2021 and modestly nudge higher in 2022, given the continued slack in labour market and spare capacity in the economy. Nevertheless, the MPC noted of some risks to inflation from prolonged supply-related disruptions.

HLIB’s VIEW

With the OPR maintained at a record low, the MPC opines that the current monetary policy stance is appropriate and accommodative, in addition to the various fiscal and financial measures announced in Budget 2022 (e.g. Bantuan Keluarga Malaysia cash assistance, JAMINKERJA and lower EPF contribution) to support economic activity. Continued expansion in global demand is also expected to support the domestic growth momentum. Nevertheless, as Malaysia’s economy is deeply entwined in the global value chain, prolonged supply disruptions could affect domestic trade and manufacturing activity. We maintain our expectation for MPC to keep OPR unchanged at 1.75% until 1H22 and increase the OPR by 25bps in the latter half of 2022, when economic recovery is more well-entrenched.

Source: Hong Leong Investment Bank Research - 5 Nov 2021