• BNM guided that it will extend the flexibility for banking institutions to use MGS and MGII to meet the SRR compliance until 31 December 2022.
• There are still downside risks to economic outlook mainly from ongoing uncertainties surrounding the pandemic and likely obstacles which might hinder the roll-out of vaccines globally and domestically.
• We anticipate BNM to adopt a wait-and-see approach and maintain the OPR at 1.75% for the time being, especially after the introduction of PERMAI stimulus package.

BNM Kept Its Statutory Reserve Requirement (SRR) at 2%

Bank Negara Malaysia kept its overnight policy rate (OPR) unchanged at 1.75% for the third consecutive Monetary Policy Committee (MPC) meeting since 4Q20 and at its first meeting of 2021. As a form of monetary policy easing, BNM will extend the flexibility for banking institutions to use MGS and MGII to meet the Statutory Reserve Requirement (SRR) compliance (extended from 31 May 2021 until 31 December 2022). The SRR was kept unchanged at 2%. Since 1Q20, the move by BNM to reduce the SRR ratio from 3% to 2% as well as allowing the flexibility to use MGS and MGII compliance has released close to RM46bn of liquidity into the banking system. The latest decision to extend the flexibility is to ensure sufficient liquidity to support financial intermediation activity.

In the latest MPC statement assessing the domestic economy, BNM cautioned that the recovery in GDP growth for 4Q20 (figures to be released on 11 February 2021), has been impacted following the reintroduction of containment measures amid the rise in cases during 4Q20. BNM anticipates 2020 growth to be near the lower end of the earlier forecast range of between -3.5% and -5.5%. As for 2021, although growth in the near term will likely be negatively affected by the reinstatement of the MCO 2.0, BNM anticipates the impact to be less dire compared to the previous MCO in 2020. BNM noted that economic growth is projected to improve from 2Q21 onwards led by a recovery in global demand, a rebound in public and private sector expenditure as well as an increase in production from existing and new manufacturing and mining facilities. In addition, the roll-out of vaccines which is anticipated to start by early March will also support sentiment. However, BNM cautioned that there are still downside risks to economic outlook, mainly from ongoing uncertainties surrounding the pandemic and likely obstacles which might hinder the roll-out of vaccines globally and domestically. On the inflation front, BNM guided that it maintains its projection of negative headline inflation in 2020 amid low global oil prices. However, headline inflation is expected to average higher but be manageable in 2021, within its projection range of between 1.0-3.0% led by higher global oil prices.

Going forward, we believe the decision on OPR direction will depend on the duration of enforcement of MCO due to uncertainties surrounding the domestic Covid-19 situation, and its impact on the economy from containment measures. We believe the recent announcement of the inclusion of five more states under MCO from January 22nd , with the whole of Malaysia except for Sarawak under stricter containment measures compared to the initial five states and Federal Territories (Penang, Selangor, Melaka, Johor, Sabah, KL, Labuan and Putrajaya), will place a drag on economic activities, especially in 1Q21. However, we believe BNM will likely adopt a wait-and-see approach before deciding on its next course of action. At the moment, we maintain our view that BNM will likely keep its OPR at 1.75% throughout 2021. After the introduction of the RM15bn PERMAI stimulus package, we believe there is possibility of further fiscal stimulus measures being introduced, especially if the MCO gets extended beyond two weeks, and the concerns of possible deterioration in economic activity from softness in labour market conditions, shift in consumer spending patterns, as well as declining tourism-related sectors. Based on official estimates, the domestic economy suffered economic losses by an estimated RM600m per day during MCO 2.0, as compared to the previous losses of about RM2bn per day during MCO in 2Q20. However, we believe the RM15bn stimulus package and new direct fiscal injection will provide some support to the recovery in domestic economy.

Source: Affin Hwang Research - 21 Jan 2021