• Bank Negara Malaysia (BNM) has decided to hold its overnight policy rate (OPR) at 1.75%, amidst a rather mixed market expectation.
  • We were rather surprised as we were among the 11 out of 23 respondents (Bloomberg poll) expecting a 25-basis-point (bp) rate cut.
     
• Extending the flexibility for banking institutions to use MGS and MGII to meet the SRR compliance until 31 December 2022.
  • As part of BNM’s effort to ensure sufficient liquidity (since 5 May 2020), the flexibility will be extended from 31 May 2021. Meanwhile, BNM retains the Statutory Reserve Requirement (SRR) ratio at 2.00%.
     
  • Following the reduction in the SRR ratio by 100 bp and flexibility to recognise MGS and MGII as part of SRR compliance since March last year, it has released about RM46.0b worth of liquidity into the banking system.
     
• MPC statement: Sanguine on global recovery prospects but cautious on domestic growth outlook.
  • The Monetary Policy Committee (MPC) stated that “the expedited roll-out of mass vaccination programmes, together with ongoing policy support, are expected to lift global growth prospects going forward.
     
  • Domestically, however, it admitted that “the resurgence in COVID-19 cases and the introduction of targeted containment measures have affected the recovery momentum in the fourth quarter of 2020,” adding that growth for 2020 would likely be closer to the lower end of its earlier forecast range of -3.5% to -5.5%. The current official forecast for 2020 is -4.5% (KIBB: -5.3%).
     
  • For 2021, BNM sees growth to be affected by the reintroduction of stricter containment measures or the Movement Control Order (MCO 2.0). However, it stated that “the impact will be less severe than that experienced in 2020,” and “is projected to improve from the second quarter onwards”. This is predicated on its expectation of a “recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new manufacturing and mining facilities,” as well as “the rollout of vaccines in the coming months.”
     
  • Putting more weight on BNM’s concerns on the downside risks to the outlook “stemming mainly from ongoing uncertainties surrounding the dynamics of the pandemic and potential challenges that might affect the roll-out of vaccines both globally and domestically”, we have earlier revised our 2021 GDP growth forecast to 3.9% from 6.1%.
     
• Rate outlook: Rising uncertainty and severity of COVID-19 cases could raise the probability of a rate cut.
  • BNM reiterated that continued spare capacity in the economy to mute underlying inflation for 2021. Along with the expectation that growth would be further pared down by the economy suffering from the extended impact of MCO 2.0, we continue to believe there is still room for BNM to cut the OPR and more likely it has to be soon for it to be more effective in supporting the fiscal stimulus measures.

Source: Kenanga Research - 21 Jan 2021