• BNM guided that it considers the current stance of monetary policy to be appropriate and accommodative
• BNM expects growth to improve from 2Q21 onwards led by rebound in global demand, higher public and private sector expenditure on the back of continued support from policy measures as well as more targeted containment measures
• We anticipate BNM to adopt a wait-and-see approach and likely to maintain its OPR at 1.75% throughout 2021

Vaccine rollout alongside fiscal and monetary policy measures to support growth

Bank Negara Malaysia (BNM) kept its overnight policy rate (OPR) unchanged at 1.75% for the fourth consecutive Monetary Policy Committee (MPC) meeting since 4Q20. BNM considers the current stance to be appropriate and accommodative, which we also believe, after lowering the policy rate by a total of 125bps from 3.0% to 1.75% in 2020, as well as providing flexibility for banking institutions to use MGS and MGII to meet SRR compliance, which has been extended until 31st December 2022. In the latest MPC statement, BNM is cautiously optimistic on the state of the global economy, where it guided that although recovery has been uneven, the momentum has been picking up led by improvements in manufacturing and trade activity. This was partly attributed to the ongoing vaccination programmes in several countries alongside policy support that continues to support private demand and positive labour market conditions. However, BNM cautioned that while risks to the global economy have lessened slightly, the outlook is still tilted towards the downside amid uncertainty surrounding the pandemic and effectiveness of the vaccination programmes.

As for the domestic economy, BNM guided that latest indicators reflect a recovery in external demand and consumer spending. Although 1Q21 GDP growth will likely be weighed down by the reinstatement of MCO from 13 January to 4 March 2021, the impact is not anticipated to be as severe as in 2Q20. Going forward, BNM expects growth to improve from 2Q21 onwards led by rebound in global demand, higher public and private sector expenditure on the back of continued support from policy measures as well as more targeted containment measures. In addition, according to BNM, increasing production from existing and new manufacturing facilities especially in E&E and primaryrelated sub-sectors as well as oil and gas facilities will also support growth in 2021. BNM also noted that the domestic National Covid-19 Immunisation Programme will boost sentiments and economic activity. On the inflation front, BNM guided that it maintains its projection of higher average inflation, which we believe will be within its projection range of between 1.0-3.0% in 2021, mainly due to a higher increase in domestic retail fuel prices from higher global oil prices.

Going forward, we believe BNM will likely adopt a wait-and-see approach before deciding its next course of action on future OPR direction, which will depend on prospects or challenges that may affect the roll-out of vaccines both globally and domestically. Nevertheless, we anticipate economic activity to recover from 1Q21, where following the replacement of MCO 2.0 with CMCO for Selangor, Kuala Lumpur, Johor and Penang from 5 March to 18 March alongside the ongoing CMCO in Kedah, Kelantan, Negeri Sembilan, Sarawak and Perak, the containment measures will be even less severe from 2Q21. Recently, the Government noted that the domestic economy suffered economic losses of about RM300m a day during MCO 2.0, which was lower than the preliminary estimate of RM700m in early February and compared to losses of RM2.4 billion a day during the MCO 1.0 last year. In addition, we believe the commencement of National Covid-19 Immunisation Programme at the end of February 2021 will likely also support the pace of economic recovery, lifting business and consumer sentiments. Besides that, we also expect fiscal stimulus support from Budget 2021 as well as recent PERMAI package and targeted repayment assistance to also support economic recovery. As such, we maintain our view that BNM will likely keep its OPR at 1.75% throughout 2021.

Source: Affin Hwang Research - 5 Mar 2021