By ASILA JALIL / Pic TMR

BANK Negara Malaysia’s (BNM) decision to hold the Overnight Policy Rate (OPR) steady at 1.75% indicates there is still space in the economy where resources are not being fully utilised.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the move reflected the central bank’s confidence in the economic recovery.

“As indicated by the BNM, there is spare capacity in the economy which means the economy would continue to grow below potential level.

“It also means the economy is not going to achieve the full employment fairly soon. Therefore, there is a strong case to keep the OPR at present level,” he told The Malaysian Reserve yesterday.

He added that the central bank is cognisant of the potential risks to the outlook, especially when the

global economic recovery occurs at varying degree. It also means downside risks to the economy will continue to be visible.

“In other words, if the present economic condition deteriorates, further reduction in the policy rates could happen to provide support to the economy,” he said.

BNM noted that global economic recovery is gaining momentum although it is uneven, supported by steady improvements in manufacturing and trade activities.

Vaccine rollout programmes in many countries along with policy support will further facilitate improvements in private demand and labour market conditions.

“While financial markets have experienced bouts of volatility, financial conditions remain supportive of economic activity.

“Risks to the growth outlook have abated slightly but remain tilted to the downside, primarily due to uncertainty over the path of

the Covid-19 pandemic and effectiveness of the vaccination pro- grammes,” it noted in a statement yesterday.

The central bank added that latest indicators showed improvements in external demand and continued consumer spending.

The reimposition of containment measures in January will affect growth in the first quarter (1Q), but the impact is expected to be less severe than that experienced in the 2Q20.

BNM projects economic growth to improve in 2Q onwards driven by recovery in global demand, as well as increased public and private sector expenditures amid continued support from policy measures and more targeted containment measures.

Higher production from existing and new manufacturing facilities, particularly in the electrical and electronics, primary- related subsectors, and oil and gas facilities would also support growth.

“The growth outlook, however, remains subject to downside risks, stemming mainly from ongoing uncertainties in developments related to the pandemic and potential challenges that might affect the rollout of vaccines both globally and domestically,” it said.

BNM noted that headline inflation is projected to average higher this year mainly due to higher global oil prices.

Headline inflation is also anticipated to temporarily spike in 2Q21 due to the lower base from the low domestic retail fuel prices in the corresponding quarter last year before moderating thereafter.

The Centre for Market Education (CME) and Bait Al Amanah’s Macroeconomic Observatory (MEO) welcomed BNM’s decision to keep the rates unchanged, stating that the efficacy of monetary policy in relaunching investment activity in the current situation would be very limited.

CME CEO Dr Carmelo Ferlito explained that Europe and Japan have proven decades of negative interest rates are not sufficient to stimulate the economy.

MEO emphasised that although gradual ease of movement restrictions and vaccine rollout play an important role, the situation is still clouded by political instability and the lack of an economic strategy.

“MEO invites the government to do more in order to identify an economic strategy which is beyond the need of the day, focusing on a comprehensive plan to rebuild confidence in the country.

“With regard to monetary policy, instead, MEO stresses the importance to remain on the prudent path and to recognise the role that an increased level of saving can play in soundly financing new investments,” it said in a statement yesterday.