● Bank Negara Malaysia (BNM) decided to retain the overnight policy rate (OPR) at 1.75%, within house view but a rather mixed market expectation.

− While 12 respondents (Bloomberg survey) expected no rate cut, nine predicted a 25- basis-point (bp) cut.

● MPC statement: More sanguine on recovery prospect but remain cautious.

− The Monetary Policy Committee (MPC) pointed out that the continued improvement in labour market conditions, household spending and trade activity have been “supported by the fiscal stimulus packages, alongside monetary and financial measures.”

● Growth outlook: Improvement to continue into 2021 but uneven and subject to downside risk

− BNM sees the macro improvement “to continue into 2021 supported by recovery in external demand and expansion in private sector expenditure.” However, BNM is concerned that “the pace of recovery will be uneven across sectors, with economic activity in some industries remaining below pre-pandemic levels, and a slower improvement in the labour market.”

− However, we like to emphasise that its outlook “is still subject to downside risks, particularly from ongoing uncertainties surrounding the course of the pandemic domestically and globally.” BNM has recently revised its 2020 GDP forecast downward to between -5.5% and -3.5% from -2.0% and 0.5%, mainly to reflect the severity of the impact of COVID-19 pandemic. House GDP growth projection is -5.9% for this year and a rebound of 5.1% in 2021.

● Rate outlook: BNM sees rate level about right for now, suggesting higher probability of no rate cut till year end

− BNM expects inflationary pressures to remain muted in 2020. Given the substantially lower global oil and commodity prices, BNM sees average headline inflation growth to be “negative in 2020, and average higher in 2021.” It added that “underlying inflation is expected to be subdued amid spare capacity in the economy.”

− Overall, BNM seems to be at ease that the cumulative 125 bps reduction in the OPR this year “will continue to provide stimulus to the economy.” Along with its cautiously optimistic growth and muted inflation outlook, this explains why the MPC “considers the stance of monetary policy to be appropriate and accommodative.”

− Given the relatively upbeat tone by BNM on the recovery outlook, we see a higher probability that the central bank would keep the OPR unchanged at 1.75% till end of the year. Nevertheless, we believe BNM still has room to lean towards further monetary easing should the recovery pace weaken, given that the downside risk remains on domestic political and geopolitical uncertainty along with fears of a new wave of COVID-19 infections, which could undermine growth recovery. We also do not rule out alternative monetary tools to be deployed to complement the conventional rate cut to support the economic growth recovery.

Source: Kenanga Research - 11 Sept 2020