• BNM guided that the cumulative 125bps reduction in OPR this year will continue to provide stimulus to the economy
• BNM noted it “remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery”.
• With the possibility of targeted stimulus measures as well as earlier stimulus packages supporting economic growth, this reinforces our view that BNM will likely leave its OPR unchanged at 1.75% for 2020

Cumulative OPR reductions made this year to provide stimulus to economy

Having cut its overnight policy rate (OPR) for the past four meetings since early 2020 by a cumulative 125bps, members of the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided to keep the policy rate unchanged at 1.75%. BNM took a pause after a 25bps cut in January, 25bps cut in March, 50bps cut in May and another 25bps in July, guiding that the earlier reduction in OPR this year will provide stimulus to the economy. BNM also noted that domestic economic activity has continued to improve from its trough in April 2020, as reflected in labour market conditions, household spending and trade activity. The economic recovery was supported by fiscal stimulus measures as well as monetary and financial measures. The pause was also consistent with the latest assessment of the economic growth and inflation prospects, where improvement in recent high frequency economic indicators may have partly influenced the decision.

Going forward into 2021, BNM expects the growth recovery to continue, led by external demand and higher private sector expenditure. However, it cautioned that the pace of recovery will still be uneven across sectors, as economic activity in some industries continues to be below pre-pandemic levels and also given a slower improvement in the labour market. In its latest assessment of the global economy, BNM’s tone on the outlook of global economic conditions was cautiously optimistic, as it noted that the global economy will continue to improve, supported by easing containment measures across several economies as well as strong policy support. This has resulted in the resumption of manufacturing and trade activities. However, BNM highlighted that the pace of recovery in the services sector has been slower. BNM cautioned that there are still downside risks and uncertainty to the global outlook mainly due to the risk of resurgence of the COVID19 pandemic and softer labour market conditions. Although financial conditions have improved, risk aversion continues to be elevated. 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 prices. However, headline inflation is expected to average higher in 2021, within its projection range of 1-3%.

On the growth front, BNM recently revised its real GDP growth projection lower to a range of between -3.5% to -5.5% for 2020 from -2% to +0.5% previously, following the sharp contraction in GDP growth of -17.1% yoy in 2Q20 (0.7% in 1Q20). However, we believe the country’s real GDP growth hit bottom in 2Q20, and will gradually improve in 2H20, where our estimates show growth will likely contract at a smaller magnitude of 0.8% yoy, from -8.3% in 1H20. For the full year, we expect real GDP growth to contract by an average of -4.5%. For 2021, we are projecting real GDP growth to expand by 6.0% yoy, as compared to the official forecast of between 5.5% to 8%. We believe there is still room for targeted fiscal policy initiatives to support the economy. The country’s Ministry of Finance (MOF) guided recently the possibility of targeted stimulus measures if economic growth slows unexpectedly. However, we believe earlier stimulus packages will continue to support growth and are unlikely to wear off in 2H20, reinforcing our view that BNM will likely leave its OPR unchanged at 1.75% in the remaining MPC meeting for 2020 (as scheduled on 3 November 2020). If domestic economic conditions continue to improve further next year, in tandem with a recovery in global economic growth, we believe this will lead to a possible gradual normalisation of monetary policy, and forecast the overnight policy rate to increase by 25bps from the current 1.75% to 2.0% by late 2021.

Source: Affin Hwang Research - 11 Sept 2020