BNM seen holding OPR at 1.75% until year-end

The central bank has reiterated that it remains committed to utilising its policy levers as appropriate to create enabling conditions for a sustainable economic recovery


BANK Negara Malaysia (BNM) is expected to hold the Overnight Policy Rate (OPR) at 1.75% for the remainder of the year on views that inflation would remain transitory and subdued, according to economists.

Malaysian Rating Corp Bhd analysts Lee Si Xin and Firdaos Rosli said they anticipate BNM extending its pause at least through the whole of 2021, until a recovery is cemented.

“That said, BNM has reiterated that it remains committed to utilising its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

“As such, we do not rule out the possibility that BNM will introduce measures other than interest rate adjustments to support the economy,” the analysts said in a report last Friday.

At the Monetary Policy Committee (MPC) meeting last week, the central bank had decided to keep the key rate unchanged at 1.75%, an all-time low that has been since May 2020.

BNM projected that the headline inflation for 2021 will average closer to the lower bound of a range between 2.5% and 4%.

Lee and Firdaos said BNM would be more comfortable to keep the OPR low for an extended period to support the economy

with the expectation of core inflation to average between 0.5% and 1.5% for 2021 amid continued spare capacity in the economy.

They also said recent weakness in the ringgit should deter the central bank from making further OPR reductions.

“The ringgit has depreciated 3.8% since the beginning of 2021 amid a strengthening US dollar.

“With the US Federal Reserve taking on a relatively hawkish stance in its latest policy meeting, we caution that some capital may start to flow out from emerging markets, including Malaysia, towards US dollar-denominated assets,” they added.

The analysts also said further OPR cuts could potentially exacerbate financial vulnerabilities such as rising household debt.

CGS-CIMB Securities Sdn Bhd economists Michelle Chia and Lim Yee Ping retained their end-2021 OPR forecast at 1.75%, expecting BNM to hold the policy rate during the remaining two MPC meetings in September and November.

The economists said the decision to stay put despite greater uncertainties surrounding GDP outlook suggests that impetus to cut needs to be accompanied by more significant and protracted deterioration in economic fundamentals.

That said, factors delaying the relaxation of containment measures or triggering a further reduction in operating capacity, without corresponding remedial measures from the government or government-linked companies could trigger a change in monetary policy stance.

The views are underlined by the assumption that more economic sectors are reopened by September as the country enters Phase 3 of the National Recovery Plan as planned.

Public Investment Bank Bhd economist Dr Rosnani Rasul said the data-dependent strategy by the central bank following the lag impact of stimulus spending and accommodative interest rate environment should see the OPR remaining steady for the rest of the year.

She noted that economic activity is set to rebound this year to be driven, among others, by massive fiscal stimulus programmes that will be rolled out fully this year under eight Covid-19 fiscal stimulus programmes worth RM530 billion.

The economist said growth will also be boosted by favourable external conditions that will spur demand for agriculture, manufacturing and mining goods and supported by an accommodative interest rate environment amid a rebound in inflation that will be driven by global cost-push factors, especially oil.

“Other growth drivers may come from the creation of at least 500,000 new employment through the private-public initiatives that will boost income and consumption activity further,” Rosnani added.