Bank Negara Malaysia (BNM) will likely refrain from further reducing the overnight policy rate (OPR) throughout 2021, said economists from several organisations. This follows the central bank’s decision to maintain the OPR at 1.75% at its November Monetary Policy Committee (MPC) meeting yesterday.
CGS-CIMB economist, Michelle Chia based her prediction on BNM’s statement yesterday, which said that the current monetary settings were “appropriate and accommodative”. According to her, this can be interpreted as a signal for an extended pause.
“Despite our views that BNM retains the policy space to be more accommodative given the significant output gap and weak inflation outlook, we think the central bank is taking the stance that monetary policy is sufficiently calibrated. Therefore, we expect the OPR to remain unchanged at 1.75% until end-2021,” said Chia.
Likewise, MIDF Research also agreed that there is no need to reduce the OPR again as the current rate is accommodative. This is supported by the latest leading index, which suggested that economic recovery will continue over the coming months, sustaining well into 2021. To clarify, the leading index is an instrument used to predict the country’s economic performance and direction about four to six months in advance. MIDF Research also noted that BNM has enough room to reduce the OPR again if the economic recovery faces any pitfalls and/or slows down in the future.
Meanwhile, economist from UOB Malaysia, Julia Goh said that further cuts to the OPR will have a lower or diminishing positive impact on the economy. As such, she expects the OPR to be maintained until the end of 2021 unless significant threats were to crop up again. She also foresees additional financial support from the upcoming Budget 2021, which could include the extension of cash aid, wage subsidies, and assistance for small and medium enterprises (SMEs).
“BNM said there are other policy levers that can be used to support economic recovery. These include over RM18 billion of funds allocated for SME financing. We understand that BNM has the capacity to increase this allocation for guaranteed funds and upsizing of funds when the need arises,” said Goh.
OCBC Bank economist, Wellian Wiranto also weighed in on the issue, saying that BNM is likely trying to strike a balance on multiple fronts. “Even as it (BNM) acknowledges the downside risks, it wants to note that the outlook remains brighter than what the headlines might suggest,” he said.
Wiranto also noted that BNM has “left the door open” for further cuts in the OPR if necessary, and will act quickly should the economy be affected in Q4 – whether caused by a drop in exports or an enforced pause on business activities. “Even though the next MPC meeting will not take place until 19-20 January 2021, if push comes to shove, there might even be an inter-meeting decision to cut as well – if necessary,” he said.
For context, BNM had reduced Malaysia’s OPR from 3.00% to an all-time low of 1.75% with four cuts this year. The first was carried out in January, with a reduction of 25 basis points, followed by a second 25-basis points cut in March. In May and July, the OPR was slashed by another 50 basis points and 25 basis points, respectively, bringing it to the current 1.75%.
(Source: The Edge Markets)