● Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at 1.75%, within

house and the general market expectation.

- 16 of the 21 respondents (Bloomberg poll) expected no rate cut, while the remaining five

expected a 25-basis-point (bp) cut.

● MPC statement: Cautious on recovery prospect on resurgence of COVID-19 infections.

- The Monetary Policy Committee (MPC)

pointed out that “the latest indicators point towards significant improvement in economic activity in the third quarter.”

- However, it cautioned that “the introduction of targeted measures to contain COVID-19 in several states could affect the momentum of the recovery in the fourth quarter.”

● Growth outlook: Maintain sanguine outlook for 2021 though uneven and subject to downside risk

- BNM sees GDP growth for the year 2020 to be within the earlier forecasted range (-5.5% and -3.5% vs. KIBB: - 5.9%) though “the introduction of targeted measures to contain COVID-19 in several states could affect the momentum of the recovery in the 4Q20.” For 2021, BNM projects economic activity to improve further “underpinned by the recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new facility.” House projects GDP to rebound to 5.3% in 2021.

- Nevertheless, BMM expects “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.” Downside risks to the outlook remain arising from ongoing uncertainties surrounding the pandemic globally and domestically.

● Rate outlook: Rising uncertainty raises the probability of another cut early next year

- No change to BNM’s inflation outlook for this year which is “likely to average negative given the substantially lower global oil prices and to average higher in 2021”. Global oil and commodity prices will continue to be a big influence. Meanwhile, continued spare capacity in the economy to mute underlying inflation going into 2021.

- With the economy suffering from a second major outbreak of the virus, we expect this would raise the probability that the easing cycle would resume. Hence, we are currently assigning a 50% probability of a 25bp rate cut in the next meeting in January. A rate cut decision will depend on the severity of the COVID-19 situation and the continued risk of undermining the growth recovery.

Source: Kenanga Research - 4 Nov 2020