BNM likely to keep OPR at 1.75%

Last year OPR cuts and fiscal support will continue to back the economy recovery moving forward, economists say


ECONOMISTS foresee Bank Negara Malaysia (BNM) to maintain its Overnight Policy Rate (OPR) at 1.75% at this year’s second Monetary Policy Committee (MPC) meeting today.

MIDF Amanah Investment Bank Bhd (MIDF Research) economist Mazlina Abdul Rahman said previous cuts in the OPR and some fiscal support, which are still in place this year, will continue to back the economic recovery moving forward.

“We expect BNM to maintain the OPR at 1.75% at the meeting as the pressure for another cut has somewhat been reduced with the number of daily Covid-19 cases in the country trending downward and most of the restrictions have also been eased.

“Recent announcements made on Tuesday showed only interstate travels are currently not allowed while other activities can be run, adhering to standard operating procedures (SOPs),” she told The Malaysian Reserve (TMR).

In July last year, BNM reduced the OPR to 1.75%, a record low since the floor was set in 2004. It has since maintained the rate.

MIDF Research is in the view that the OPR will remain unchanged at 1.75% for 2021.

The recent re-implementation of Movement Control Order (MCO) will have some adverse impact on Malaysia’s economic performance particularly in the first quarter of 2021 (1Q21) but in general, the research house expects the economy to remain on a recovery path.

Mazlina said the recovery is expected to be more evident from 2Q21 onwards.

“Vaccination programmes, which have kick-started, support the estimate as it will strengthen both consumer and business sentiments. This will eventually improve consumption and investment activities, stabilising the labour market and uplift the economy.

“Any further support to the economy has to be on a selective or targeted basis to avoid overdoing things which could be damaging in the long run or in the event of another unprecedented situation,” she added.

OCBC Bank economist Wellian Wiranto also sees the central bank standing pat on the OPR.

“Our sense is that BNM still retains the “glass half full” perspective that focuses more on the upside risks to come in growth prospects into the second half of this year, rather than downside risks that have already transpired in 4Q20 and in the current period.

“If those upside risks pan out, we might well see the OPR staying unchanged not just for the immediate MPC, but for the remainder of 2021. A few stars have to be aligned, however. These would include a steady recovery in the exports market,” he told TMR.

On that front, while January’s 6.6% exports growth remains encouraging, it marks the first time it has surprised on the low side since August 2020.

“The other necessary ‘star’ will be a recovery in business and consumer confidence. Here, a successful rollout of the vaccination programme will be key.

“While the government has made valiant effort in securing more supplies to fulfil the goal of vaccinating fully by February 2022, the effect might take a while to pan out. We are hopeful, but the jury may still be out on this one,” he said.

Having weathered the recent Covid-19 storm, Oanda Corp senior market analyst for Asia-Pacific Jeffrey Halley said Malaysia’s recovery should get back on track, but BNM will want to keep monetary dry powder in case things take a sharp turn for the worse.

He believes BNM will be wary about more spikes in US yields putting pressure on emerging market currencies.

“I expect BNM to keep rates unchanged for all of 2021 and monetary policy supportive in general. It is far too early to draw that conclusion, vaccinations have only just started and on a small scale,” he added.

As BNM is looking through the MCO or Covid wave to a 2Q recovery, AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes believes the easing cycle is over.

However, he thinks the next move for global central banks, including BNM, will be a rate hike. Although that will be well into 2023.

“In the meantime, the BNM will keep policy powder dry to gauge the pace of the economic recovery as mobility restrictions ease and vaccines become more widely distributed. When mobility opens up, the economy should greatly improve,” Innes said.