• Bank Negara Malaysia (BNM) expectedly continued to maintain its overnight policy rate (OPR) at 1.75%.
  • We were among the 18 out of 23 respondents (Bloomberg poll) expecting status quo.
• Policy statement: Reduced cautionary outlook on domestic economy while acknowledged the global economic recovery is gaining traction.
  • The Monetary Policy Committee (MPC) stated that “the ongoing roll-out of vaccination programmes in many economies, together with policy support, will further facilitate an improvement in private demand and labour market conditions.”
  • However, due to the uncertainty over the path of the COVID-19 pandemic and effectiveness of the vaccination programmes, MPC recognised that risk to global growth outlook “have abated slightly but remain tilted to the downside.”
  • Domestically, BNM sees uncertainties in developments related to the pandemic and potential challenges that might affect the roll-out of vaccines both globally and domestically to weigh on the growth outlook.
  • On the upside, BNM sees the roll out of COVID-19 vaccine programme domestically to lift sentiment and economic activity. Going forward, MPC projects GDP growth would improve from 2Q21 onwards “driven by the recovery in global demand, increased public and private sector expenditure amid continued support from policy measures and more targeted containment measures.”
  • Sector wise, BNM sees growth to be supported “by higher production from existing and new manufacturing facilities, particularly in the E&E and primary-related sub-sectors, as well as oil and gas facilities.”
  • On that basis, coupled with the further relaxation of the Movement Control Order 2.0, we have recently revised our GDP forecast for 2021 to 4.5% from 3.9% (2020: -5.6%).
• Rate outlook: Moving closer to a neutral policy stance on growth recovery prospect and rising inflation.
  • Prospects of a growth recovery this year along with a steady rise in inflation (KIBB 2021 forecast:1.4%; 2020: -1.2%) should be a relatively good reason to expect BNM to leave rates unchanged. If the economic outlook gets better and uncertainties as well as risk to growth dissipate, it’s a good argument to suggest BNM’s monetary policy bias is slowly moving towards neutral from a dovish stance.
  • Furthermore, the threat of rising US Treasury yields would also be one of the factors that may influence BNM to retain its OPR as it raises the risk of capital flight.
  • Meanwhile, there is still the underlying inflation to contend with which BNM expect it “to remain subdued amid continued spare capacity in the economy.” However, BNM still maintains that the outlook for inflation would be subjected to major changes to global oil and commodity prices.
  • While we expect the OPR to be kept unchanged for the rest of the year amid prospect of growth recovery, we continue to believe there is still room for BNM to cut the OPR if the risk to growth recovery is threaten.

Source: Kenanga Research - 5 Mar 2021