BNM to hold OPR despite possible fresh MCO

AxiCorp’s Innes feels the resurgence of Covid-19 cases has further thrown a curveball for revival


THE Overnight Policy Rate (OPR) is expected to be maintained in the next Monetary Policy Committee (MPC) meeting, scheduled to be held on Jan 20, as the country is still recovering from Covid-19 economic disruptions.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said the resurgence of Covid-19 cases has further thrown a curveball for revival.

“The economy is struggling through the ninth consecutive disinflationary month in November, Bank Negara Malaysia (BNM) could keep the powder dry until the people are moving around more freely as a rate cut does little for big-ticket consumption in Covid-19 environment.

“At the moment there are no real breakdowns or deviations from the BNM expected course of events on both growth and inflation, so I think policy stays on hold,” he told The Malaysian Reserve (TMR).

With some thought that the new Covid-19 wave could trigger a policy response, Innes believes otherwise.

“I think once the vaccine rolls out, then a rate cut count to rocket charge the economy but even then, unless there is a significant breakdown in the data, BNM could sit patiently through most of 2021 as financial conditions remain loose,” he added.

BNM decided to maintain the OPR at 1.75% during the final MPC meeting for 2020 on Nov 3.

Innes added that the cumulative 125 basis points reduction in the OPR last year will continue to provide stimulus to the economy.

For 2021, BNM expects headline inflation is projected to average higher.

The country’s inflation outlook will continue to be significantly affected by global oil and commodity prices, according to BNM.

“Underlying inflation is expected to remain subdued in 2021 amid continued spare capacity in the economy,” it said.

On the potential reinstatement of the Movement Control Order (MCO) by the government due to the rocketing infection numbers, Innes said it will have an impact on the local unit ringgit performance against the greenback.

Echoing the same, Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said cutting interest rates will have no effect on the economy if another MCO is imposed.

“What would be needed then is support for business via funding facilities and direct payments to businesses and individuals from the government, for example aggressive fiscal stimulus.

“Therefore, I see no need for BNM to enact emergency rate cuts, as they would serve only to inflate equity prices and have no meaningful effect on alleviating the stresses in the real economy,” he said.

Halley stressed there are a few moving parts between now until Jan 20, notably the stability of the current government.

“I think it is unlikely BNM will look to cut further in January if a political storm is brewing, for fear of being politicised itself.

“Although Covid-19 containment is taking its toll, there are definite signs everywhere around the world that the recovery is progressing and that is the same with Malaysia,” he told TMR.

Halley said BNM’s inclination to reverse course and raise interest rate in the early part of this year is very low and will likely wait until there are visible signs of economic recovery.

“If Malaysia’s currency was to suddenly rally on a trade-weighted basis, only then would BNM consider easing rates to lessen its appeal.

“That is unlikely in the next two weeks and I suspect BNM will be comfortable with US dollar/ringgit, as long as it remains above 3.80 in January,” he said.

Halley opined that the central bank is more likely to cut late in the first quarter when the confluence of points one and two come closer to reality.

Read our earlier report

Movement control extensions to hit recovery