• BNM guided that the latest macro indicators reflect a recovery in economic activity in the first quarter and into April, where it also noted that the impact of current MCO will be less severe as almost all economic sectors are allowed to operate
• BNM anticipates inflation to average higher by between 2.5% to 4.0% in 2021 (-1.2% in 2020), due to a lower base and temporary spike in 2Q21 from an anticipated rise in global oil prices as well as the diminishing base effect
• We anticipate BNM to adopt a wait-and-see approach and likely to maintain its OPR at 1.75% throughout 2021

Fiscal and monetary policy measures to support domestic economic growth

Bank Negara Malaysia (BNM) kept its overnight policy rate (OPR) unchanged at 1.75% for the fifth consecutive Monetary Policy Committee (MPC) meeting since 4Q20. BNM considers the current stance to be appropriate and accommodative after lowering the policy rate by a total of 125bps from 3.0% to 1.75% in 2020. In the latest MPC statement, BNM highlighted that global economic recovery continues to strengthen, supported by improvements in manufacturing and trade activity, but it cautioned that recovery pace varies across countries. BNM added that ongoing vaccination programmes in several countries, sizeable US fiscal stimulus measures alongside policy support from major economies will continue to facilitate recovery in domestic demand. We believe BNM is also taking a cautiously optimistic stance on the domestic economy, where its positive outlook on the external environment to support country’s exports, which will provide some cushion to slower growth in domestic demand as well as services sector. Going into 2Q21, with exports growth sustaining in positive territory from healthy demand for Malaysia’s E&E products, we believe the country’s manufacturing output will continue to expand from better overseas demand. We expect the positive contribution to GDP growth from the manufacturing sector will also be supported by recovery in the services sector from 2Q21.

On the domestic economy, in the latest MPC statement, BNM guided that latest macro indicators point to continued improvements in economic activity, which we believe will improve further from 1Q21 to 2Q21. BNM acknowledged that recent re-imposition of containment measures in select locations will affect economic activity in the short term, but the impact will be less severe as almost all economic sectors are allowed to operate. We concur that the recovery in country’s domestic demand will be lifted by improved business and consumer sentiments, especially from 2H21, from positive progress of the domestic National Covid-19 Immunisation Programme. We also concur that upside risk from higher pent-up demand in private consumption due to possible faster-than-expected rollout of vaccines and lifting of containment measures cannot be discounted, especially in 2H21. Nevertheless, BNM cautioned that there are also downside risks to domestic economic outlook, mainly from ongoing uncertainties surrounding the pandemic and likely obstacles which might hinder the roll-out of vaccines globally and domestically.

In terms of inflation, BNM anticipates inflation to average higher by between 2.5% to 4.0% in 2021 (-1.2% in 2020), due to a lower base and temporary spike in 2Q21 from an anticipated rise in global oil prices as well as the diminishing base effect from the tiered electricity tariff rebate which was introduced in April 2020. However, headline inflation is expected to temporarily spike in 2Q21 amid the low base effect, where inflation will moderate as the base effect dissipates in 2H21.

Going forward, the decision on OPR direction will depend on new economic data and information, which may be related to the duration of enforcement of MCO from containment measures. We believe that as long as global developments remain positive and supporting country’s exports in the near term to cushion domestic demand, BNM will likely maintain its OPR at 1.75% throughout 2021. Nevertheless, if external economic environment unexpectedly worsens, BNM remains committed to utilise its policy levers as appropriate to foster enabling conditions for a sustainable economic recovery.

Source: Affin Hwang Research - 7 May 2021