KUALA LUMPUR (May 7): Bank Negara Malaysia kept the overnight policy rate (OPR) pat at its historic low of 1.75% after its Monetary Policy Committee meeting yesterday (Thursday, May 6), and economists are expecting this rate to be kept steady throughout 2021, despite the reintroduction of the movement control order or MCO 3.0 in targeted areas, which is seen as a short-term blip to the recovery of the domestic economy.
“In our view, the central bank is looking at the improvements in economic activity in the US and extrapolating that this channel will lift Malaysia’s external sector and will be followed by income effects filtering through the domestic economy," said RHB Research senior economist Nazmi Idrus in a note yesterday.
And Malaysia's March industrial production (IPI) data, released a few hours before the BNM's announcement, also showed strong improvement in both domestic and export oriented segments, noted Nazmi, referring to the 9.3% year-on-year surge in the March IPI – the highest seen since July 2013 – driven by the manufacturing and electricity components' increase. The March factory output growth also beat Bloomberg's consensus estimate of 8.7% and February’s 1.5% growth.
Hence, Nazmi, who expects the MCO 3.0 to have a less severe impact on the economy compared to the previous two MCOs, is of the view that the central bank will look past the short-term downside risks that MCO 3.0 presents and focus on the economy's recovery in the second half of the year.
Concurring with Nazmi’ view that the OPR will be kept unchanged this year is MIDF Research, who attributed this to optimism that an economic recovery is already taking hold in Malaysia and that the current rate remains accommodative to support its economic recovery.
“At the moment, we do not foresee any need for further easing in the monetary policy but BNM has the room to cut OPR if the economic condition deteriorates significantly," the research house wrote in a separate note.
While the OPR is expected to stay at 1.75% level this year, CGS-CIMB economists Michelle Chia and Lim Yee Ping think that policy normalisation may be on the cards in 2022, predicated on a successful rollout of vaccines and an entrenched economic and labour market recovery.
The central bank's monetary policy stance on Thursday was widely expected. A Reuters poll of 13 economists saw all expecting BNM to keep the OPR steady to help support the economy's recovery, as coronavirus cases rise, even as it had benefited from strong external demand.
In announcing the unchanged OPR, the BNM noted that global economies continued to strengthen, including Malaysia's. It also said the domestic economy's growth trajectory is projected to improve, driven by a stronger recovery in global demand and increased public- and private-sector expenditure, amid continued support from policy measures.
“Growth will also be supported by higher production from existing and new manufacturing facilities, particularly in the E&E (electrical and electronics) and primary-related sub-sectors, as well as oil and gas facilities,” it said, adding that the progress of the domestic Covid-19 vaccine programme will also lift sentiments and contribute towards recovery in economic activity.
While noting that the global economic recovery has continued to strengthen, particularly in major economies – supported by improvements in manufacturing and trade activity – it forecast that the ongoing roll-out of vaccination programmes and sizeable fiscal stimulus measures in the US, as well as policy support in other major economies, will further facilitate an improvement in domestic demand.
The growth outlook, however, remains subject to downside risks, it said, stemming mainly from ongoing uncertainties in developments related to the pandemic and potential challenges that might affect the roll-out of vaccines both globally and domestically. It also cautioned that the recovery trajectory of some economies could be disrupted by the tightening of containment measures to curb Covid-19 resurgences.
“The balance of risks to the growth outlook remains tilted to the downside, due mainly to uncertainty over the path of the pandemic, as well as potential risks of heightened financial market volatility,” it said.
In terms of Malaysia's headline inflation, BNM projected it to average higher at between 2.5% and 4%, primarily due to the cost-push factor of higher global oil prices. “In terms of trajectory, headline inflation is anticipated to temporarily spike in the second quarter of 2021, due particularly to a lower base from low domestic retail fuel prices in the corresponding quarter of 2020. However, this will be transitory as headline inflation is projected to moderate thereafter, as this base effect dissipates,” it said.
Nonetheless, the underlying inflation, as measured by core inflation, is expected to remain subdued, averaging between 0.5% and 1.5% for the year, amid continued spare capacity in the economy.
Fiscal policy now seen as the main tool to support growth
Meanwhile, RHB's Nazmi is of the opinion that the fiscal policy will be the main tool to support economic growth, in case any downside risks emerge, rather than monetary policy.
“The government has enough room to invoke further counter-cyclical fiscal measures. Our analysis of the progress of fiscal measures (for example wage subsidy programme, hiring incentive programme, extended employment insurance system [EIS] payouts, etc) have shown that the disbursements have been much lesser, relative to the allocation,” he noted.
Given the unused funds, he said the government has room to implement further counter-cyclical fiscal measures to support consumer spending and the small and medium enterprises (SMEs). “In a worst-case scenario, the recent government access into the Kumpulan Wang Amanah Negara (KWAN) fund, could provide it with some fiscal space if the worst eventuality ever comes," he said.
KWAN’s total fund amounts to RM19.5 billion, of which RM5 billion has been tapped for vaccination programmes, he noted.
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