Current OPR to be maintained throughout 2021, say analysts


MALAYSIA’S Overnight Policy Rate (OPR) could remain unchanged throughout 2021 as Bank Negara Malaysia (BNM) indicated risk aversion is expected to be visible despite some improvement in global financial condition.

At this year’s final Monetary Policy Meeting yesterday, the central bank decided to maintain the key interest rate at 1.75%, adding that the economic recovery will likely remain uneven in the near term due to the disruption in business activities in light of the recent spike in Covid-19 cases.

BNM has reduced the OPR by a total 125 basis points (bps) this year, making it the biggest monetary easing cycle since the global financial crisis in 2008 and 2009 when it reduced the benchmark interest rate by 150bps.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said BNM’s decision is aligned with the nominal trade balance in the third quarter this year (3Q20), which will positively boost Malaysia’s GDP for the quarter.

“Perhaps, we could see positive growth in GDP during the September quarter albeit very marginal. The latest print in the 3Q20 nominal trade balance saw a significant jump of 68% compared to last year. In that sense, the net exports are expected to contribute positively to the GDP. Therefore, it makes sense to keep the OPR unchanged,” he told The Malaysian Reserve.

The central bank noted that the current monetary settings are “appropriate and accommodative”, which reads as a signal for an extended pause, said CGS-CIMB Securities Sdn Bhd.

“Despite our view 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,” it stated.

The research firm added that the burden of providing the next leg of economic stimulus lies with the fiscal policy with market attention turning to the tabling of Budget 2021 this Friday, which is likely to remain expansionary.

“The policymakers believe a recovery in global demand, normalisation of public and private sector activities and policy support are sufficient to guide Malaysia’s GDP toward a target growth rate of 5.5% to 8% in 2021,” it said.

MIDF Amanah Investment Bank Bhd believes there is no need for further easing in the OPR rate as the monetary policy is deemed accommodative to support economic recovery.

“The latest Leading Index indicates economic recovery will continue in the coming months, therefore the improvement in economic activities is expected to sustain going into 2021,” it said.

The investment bank added that BNM has enough room to lower the OPR should the economic recovery face any pitfalls and slow down in the future.

“With the inflationary pressures remaining subdued, the current policy direction needs to ensure the recovery will sustain amid the ongoing efforts to contain the resurgence of Covid-19 cases,” it said.

In its statement yesterday, the central bank noted that headline inflation is anticipated to average negative this year due to the substantially lower global oil prices before averaging higher in 2021.

It added that inflation will continue to be significantly affected by the global oil and commodity prices, while the underlying inflation is expected to remain subdued next year amid the continued spare capacity in the economy.

It also noted that indicators for Malaysia currently point to a significant improvement in economic activities in 3Q20, however, the measures to contain the spread of Covid-19 could affect the momentum of the recovery in the last quarter of the year.

“Economic performance for 2020 is expected to be within the earlier forecast range. For 2021, economic activities are projected to improve further underpinned by the recovery in global demand, the turnaround in public and private sector expenditures amid continued support from policy measures, and the higher production from existing and new facilities,” BNM said.