● No change to the Bank Negara Malaysia (BNM) overnight policy rate (OPR) at 1.75% at the fourth Monetary Policy Committee (MPC) meeting this year.

● Policy statement: MPC acknowledged improvements in global economic recovery though uneven. On domestic economy, it continues to remain cautious.

• Overall, it stated that “the balance of risks to growth remains tilted to the downside, due mainly to the path of the pandemic as well as potential risks of heightened financial market volatility.”
• Domestically, BNM expressed concern that “the re-imposition of nation-wide containment measures to curb the resurgence in COVID-19 cases, however, will dampen the growth momentum.”
• It still believes that the “various policy support packages will alleviate some of the financial burdens of households and businesses,” and “favourable external demand conditions will continue to provide a lift to growth.” This gives some comfort that GDP growth in the 2Q21 (KIBB forecast: 11.7%; 1Q21: -0.5%) and beyond could pick up pace.
• The growth trajectory, however, BNM noted, “remains subject to significant downside risks, due mainly to factors that could lead to a delay in the easing of containment measures or imposition of tighter containment measures, and a weaker-thanexpected global growth recovery.”
• It opined that the recent spike of the headline inflation as “transitory” and “is projected to moderate in the near term as this base effect dissipates.”It sees headline inflation to average closerto the lower bound range of its 2021 forecast of 2.5%-4.0% (KIBB: 1.8%).Core inflation, however, is expected to remain subdued, averaging 0.5% and 1.5%, on the back of spare capacity in the economy but that may change subjected to global commodity price developments.

● BNM OPR outlook: To hold policy rate steady in 2021 but probability to cut would likely rise if tighter containment measures prolong.

• We still believe that BNM monetary policy mode is still adjusting to the transition towards a neutral stance from being dovish, as it sees improvement in the global growth recovery along with the rise in commodity prices and headline inflation.
• Overall, the tone of the statement has not changed that much from the previous MPC meeting.
• However, we are concerned that the market might also think that doesn’t mean BNM would not change its mind if the pandemic situation worsens as the government may not be able to control the persistent surge in the number of cases, or fall short of achieving the vaccination target.
• Hence, the government may be forced to further extend and prolong the strict Enhanced Movement Control Order period, bringing about a detrimental effect on livelihood and the economy.
• As the fiscal space is increasingly limited and debt headroom to raise funds to finance the deficit, is shrinking as well as measures to support the SMEs could be limited or ineffective, BNM may consider taking the rate cut route. But the probability of that happening remains considerably low for now.
• Barring a major risk to the financial market and the economy due to the negative spillover from the pandemic, we reckon BNM would save its bullets and continue to let fiscal policy take the lead. We maintain our view that the OPR will remain at 1.75% for the rest of the year.

Source: Kenanga Research - 9 Jul 2021