Additional Policy Stimulus to Safeguard Against Downside Risks

Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR) by another 25bps to a record low of 1.75%. BNM has lowered its OPR by a total of 125bps since early 2020 in an effort to support domestic economic activity from the impact of Covid-19. It guided that the latest OPR cut is to provide “additional policy stimulus to accelerate the pace of economic recovery.” BNM is taking a precautionary measure in view of downside risks from further Covid-19 outbreaks that may lead to the re-imposition of containment measures, as well as concern over weakness in the domestic labour market conditions. The ceiling and floor rates of the corridor of the OPR were also reduced to 2.00% and 1.50% respectively.

In its latest assessment of the global economy, BNM maintained its dovish tone on the outlook due to weak global economic conditions. It noted that recovery may still be impacted by weakness in the labour market and caution among households and businesses. While financial conditions have improved, BNM cautioned that risk aversion is still elevated. It guided that downside risks remain especially if a second wave causes another round of containment measures. This was also in line with the IMF’s June World Economic Outlook, where the 2020 global GDP growth projection was revised lower by 1.9 percentage points to -4.9% from -3% previously (2.9% in 2019).

BNM noted that domestic economic activity has begun to improve since the bottom in 2Q20, following the gradually reopening of the economy since May, and expects growth to continue to improve gradually in line with global growth conditions. In addition, fiscal stimulus packages as well as monetary and financial measures will also strengthen the domestic economy. However, it guided that the pace of recovery will be dependent on domestic and external factors such as the possibility of another outbreak, sustained weak labour market conditions and weaker-than-expected global growth recovery.

Domestic demand is gradually improving, but we believe BNM is concerned over the external sector, where exports will likely only improve in late 2020. Despite the Recovery MCO phase from 10 June to 31 Aug 2020, manufacturers in the country are unlikely to increase production significantly until they see better global economic prospects. Furthermore, external demand for Malaysia’s exports may still be affected by global supply chain disruptions. As such, the move by BNM to cut the OPR is to provide additional policy stimulus to support domestic demand. On the inflation front, BNM guided that inflationary pressures will be muted and maintains its projection of negative headline inflation this year, amid low global oil and commodity prices.

Going forward, BNM noted that it will “continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth,” while utilising policy levers to aid economic recovery. Having frontloaded a 125bps of cuts in the OPR to support economic activities, we believe BNM will likely leave its OPR unchanged at 1.75% in the remaining two MPC meetings on 10 Sept and 3 Nov 2020, unless the Covid-19 outbreak worsens unexpectedly. After the sharp contraction in economic growth in 2020, various international agencies expect a sharp recovery in Malaysia’s GDP growth of 6.3- 7.5% in 2021. Some macro indicators are slowly showing improvement in economic activity following the reopening of the economy, especially on private consumption spending, supported by the smooth implementation of fiscal stimulus packages.

Source: Affin Hwang Research - 8 Jul 2020