Even without OPR cut, real rates will turn negative this year, says Maybank IB chief economist

KUALA LUMPUR (Jan 20): A passive easing in interest rates in the country will be seen, even without making any changes to the overnight policy rate (OPR), according to Maybank Investment Bank (Maybank IB) chief economist Suhaimi Ilias.

Today, Bank Negara Malaysia decided to maintain the already record low OPR at 1.75% — as anticipated by Maybank IB.

“We are looking at inflation to make a comeback this year by 2%, after a deflation of -1% last year,” said Suhaimi, during the webinar session today, titled "Market Outlook 2021: Steering through Volatility". 

With a 2% inflation this year, it would mean that real OPR minus inflation rate will turn negative this year or -0.25%, against a real OPR of 2.75% last year.

In a nutshell, with inflation set to be seen this year, from a deflation last year, a 300-basis-point cut in interest rates would be seen.

Meanwhile, Suhaimi also reiterated a 5.1% gross domestic product growth forecast for this year. This is in contrast to the official projection of between 6.5% and 7.5%.

In terms of economic impact from the recently implemented movement control order (MCO 2.0), he noted that the daily economic losses is smaller under the MCO 2.0 at RM700 million to RM1 billion per day versus RM1 billion to RM1.5 billion during the MCO last year.

This is because, to mitigate the impact, the government has allowed five essential economic sectors to operate, namely factory and manufacturing, construction, services, trade and distribution, as well as plantations and commodities, said Suhaimi. 

"We estimated that 78% of the economy is operational under MCO 2.0 versus 40% to 45% in the second half of March last year and 52% in April 2020," he added.

While the potential extension on the lockdown remains to be seen, Suhaimi also pointed out the political instability and overhang as a risk to the country’s economic outlook.

“It is inevitable that there is an allegation or view out there that the proclamation of emergency is not just about dealing with the healthcare crisis, but also the unfolding political crisis,” he said.

Last week, it was announced that the proclamation of emergency will be effective from Jan 11 until Aug 1, 2021.

Essentially, he said the Perikatan Nasional (PN) government has lost its razor thin majority of 113, which is now down to 109.

“One seat was vacant due to the death of an Umno lawmaker, while three Umno lawmakers have announced that they no longer support PN,” said Suhaimi.

This is coupled with the risk that Barisan Nasional would leave the coalition, he added. 

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