BNM may cut OPR further if MCO extended

Analysts describe the decision as a prudent pause in light of the resurgence of Covid-19 cases which triggered a nationwide lockdown

By ASILA JALIL / Pic By MUHD AMIN NAHARUL

BANK Negara Malaysia’s (BNM) decision to keep the Overnight Policy Rate (OPR) unchanged has heightened the chances of an interest-rate cut if the Movement Control Order (MCO) is further extended.

The central bank held its benchmark policy rate steady at 1.75% yesterday, with analysts describing the decision as a prudent pause in light of the resurgence of Covid-19 cases that have triggered another nationwide lockdown.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the decision suggests that the central bank is buying time to consider the full extent of the present situation before it makes a move on its monetary stance.

“We believe BNM is very open for potential reduction in OPR. It is a question of timing and justification,” Mohd Afzanizam told The Malaysian Reserve.

“Earlier, news over the vaccine rollout may have boosted sentiments. However, new cases which have been sustained at an elevated level and the reintroduction of the MCO may have altered the way we see things.

“We are not ruling out the possibility of an OPR cut in the upcoming meeting, especially when the duration of MCO 2.0 would be extended,” he said.

BNM’s Monetary Policy Committee decided to maintain the OPR at a historical low of 1.75% as it projected the growth trajectory to improve from the second quarter (2Q) onwards.

The central bank noted that the upturn in Covid-19 cases and the introduction of targeted containment measures had affected the recovery momentum in the 4Q of 2020.

“As a result, growth for 2020 is expected to be near the lower end of the earlier forecasted range. For 2021, while near-term growth will be affected by the reintroduction of stricter containment measures, the impact will be less severe than that experienced in 2020,” BNM said in a statement yesterday.

It stated the anticipated economic improvement in the 2Q will be driven by the recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new manufacturing and mining facilities.

The rollout of vaccines in the coming months will also lift sentiments, the central bank added.

OCBC Bank (M) Bhd economist Wellian Wiranto said a cut in the OPR in 2Q could happen if economic recovery does not show much upward trajectory.

While the start of vaccination efforts is driving recovery efforts in major economies, Wiranto said potential headwinds in the form of rising new cases may cause more damage and lower the probability of a smooth vaccine rollout.

“Against the backdrop of an economic outlook that remains rather upbeat despite the changing circumstances, it does not look like BNM is in a hurry to cut rates just yet.

“We are less assured than the central bank may be, in how growth rate can pick up all that effortlessly in 2Q on the back of mass vaccination efforts, however. “The apparent baseline assumption of a smooth rollout of vaccines both globally and domestically, and how this might naturally lead to a steady growth uptick may come to be tested, as well,” he said in a note.

Malaysian Rating Corp Bhd analysts Firdaos Rosli and Lee Si Xin said the decision to maintain the OPR could lend some support to the ringgit, as the relatively high yields continue to attract foreign portfolio interest into the local bond market.

Meanwhile, Centre for Market Education CEO Dr Carmelo Ferlito said further cuts in the OPR would have pushed inflationary tendencies, which could compromise purchasing power during an already difficult time.

“What we need now is for purchasing power to be restored, and savings to be rebuilt in order to grant the creation of funds available for investment,” he said, adding a lower OPR could eventually incentivise mal-investment.

“What policymakers often disregard is the key determinant for investment is profit expectations rather than the OPR. We have seen this in many European countries, where a decade of extremely low rates has not brought any development,” he said.

In its announcement yesterday, BNM stated that headline inflation in 2021 is projected to average higher driven by higher global oil prices, while underlying inflation is expected to remain subdued amid continued spare capacity in the economy.

“Given the uncertainties surrounding the pandemic, the stance of monetary policy going forward will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.

“The bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery,” said the central bank.

BNM also announced that the extension of the flexibility for banking institutions to use Malaysian government securities (MGS) and government investment issues (MGII) to meet the statutory reserve requirement (SRR) compliance, which will be until Dec 31, 2022.

The flexibility, which was previously announced on May 5, 2020, is currently applicable until May 31, 2021. The SRR ratio remains unchanged at 2%

“The decision to extend this flexibility is part of BNM’s continuous efforts to ensure sufficient liquidity to support financial intermediation activity.

“Since March 2020, the reduction in the SRR ratio by 100 basis points and flexibility to recognise MGS and MGII as part of SRR compliance have released RM46 billion worth of liquidity into the banking system,” BNM said.