The cumulative 125bp cut this year are sufficient to prop up economic expansion, economist says

by ASILA JALIL / pic by MUHD AMIN NAHARUL

BANK Negara Malaysia (BNM) has maintained the Overnight Policy Rate (OPR) at 1.75%, as it sees improvement in the domestic economy following the easing of pandemic containment measures.

The central bank has slashed the benchmark lending rate four times since January this year in a bid to mitigate the impact of the Covid-19 pandemic, bringing the OPR to a historic low since its introduction in 2004.

“Malaysia’s economic activities continue to recover from the trough in April this year. Latest high-frequency indicators show labour market conditions, household spending and trade activities have continued to improve,” BNM said in a statement yesterday.

The country’s economic recovery is also supported by the government’s fiscal stimulus packages, it added. Malaysia’s GDP fell 17.1% in the second quarter of 2020 (2Q20) but BNM expects the economy to recover in the second half of the year (2H20).

“The cumulative 125-basis-point (bp) reduction in the OPR this year will continue to provide stimulus to the economy. Given the outlook for growth and inflation, the Monetary Policy Committee considers the stance of monetary policy to be appropriate and accommodative,” it said.

The improvement is expected to continue into 2021, backed by the recovery in external demand and expansion in private sector expenditure.

However, the pace of recovery will not be constant across sectors, as some industries are still facing economic activities below “pre-pandemic levels” along with slower improvement in the labour market.

On the global front, services are recovering slower than other sectors and risk aversion remains elevated, though financial conditions have improved.

Inflationary pressures are expected to remain muted this year while headline inflation is likely to average negative due to substantially lower global oil prices.

Headline inflation will, however, average higher next year, within the earlier projected ranges. Underlying inflation is expected to be subdued amid spare capacity in the economy.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the rate could remain at 1.75% throughout the year, as BNM appears positive on the economic outlook for the rest of 2020 and going into 2021.

“It should be positive for banks since net interest margins will not be affected. So the financing or lending rates will be the same and similarly, deposit rates,” he told The Malaysian Reserve yesterday.

The “robust” momentum in the economic recovery has enabled the central bank to “remain comforted”, with no more rate cuts required in the near term, OCBC Bank (M) Bhd economist Wellian Wiranto wrote in a note yesterday.

He said although BNM suggested the OPR will be eased in the future if necessary, the cumulative 125bp cut is sufficient to prop up economic expansion.

“It appears that BNM is comforted enough by how well the economy has healed from the pandemic damages, to take the view that households and businesses will not have any big issue servicing their loans next month,” he said.

MIDF Amanah Investment Bank Bhd also does not anticipate additional monetary easing for the rest of the year, given signs of recovering economic activities.

Following the 17.1% contraction in 2Q20 GDP, it sees the economy picking up in the 2H20 based on the recovery in consumption and business activities.

“For the whole year, we expect Malaysia’s economy to shrink by 4.8% in 2020 (2019: +4.3%), taking into account the sharp slowdown in 2Q20 and followed by the gradual recovery in both domestic and external demand in 2H20,” it said.