There surgence of Covid-19 cases globally driven by more contagious variants alongside weaker external demand could in uence Malaysia’s trade activity
by ASILA JALIL / Pic by MUHD AMIN NAHARUL
BANK Negara Malaysia (BNM) is expected to maintain the Overnight Policy Rate (OPR) at its current level of 1.75% as the rate is still deemed accommodative as the encouraging vaccination process provides support for domestic economic activities to pick up.
MIDF Research economist Abdul Mui’zz Morhalim said the central bank would factor in the signs of a slowdown in economies like China, the US and other parts of the world as a downside risk to Malaysia’s growth outlook.
He said the resurgence of Covid19 cases globally driven by more contagious variants alongside weaker external demand could influence Malaysia’s trade activity.
“As the balance of risk is still on the downside, there is a possibility for the OPR to be reduced to stimulate the economy if BNM expects the growth momentum will weaken further in the coming months.
“Despite the concerns on the external front, we expect BNM will not make any change to the OPR at the Monetary Policy Meeting today because the encouraging progress in vaccination and the recent relaxation of lockdown restrictions will allow domestic economic activities to pick up and the ongoing fiscal stimulus spending will continue to support Malaysia’s economy,” Abdul Mui’zz told The Malaysian Reserve (TMR).
He said inflation is still within BNM’s forecast range, hence the central bank is likely to maintain the OPR at the current level and will still be accommodative to the country’s economic growth.
The benchmark lending rate has remained at 1.75% since July last year, a record low rate as the country battles to contain the spread of Covid-19.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the prevailing rate is appropriate to support the economy as it is already at an all-time low.
He said lowering the key rate further might expose the country to more risks as the benefits are still uncertain at present.
“Financial stability aspects would also need to be looked at especially about risk-taking. If OPR is too low it might lead to other problems such as going into risky assets that could be detrimental if the person is not familiar with the risks that they are willing to take.
“Perhaps, keeping the OPR unchanged could be the right decision for now,” Mohd Afzanizam told TMR.
He said it is vital for the central bank to manage the inflation expectation although it might not be a problem now since the economy is still soft.
Another risk factor includes downside risks to economic growth, which will hinge on the Covid-19 situation.
“The vaccination programme has proceeded quite well and many states have shifted into the next phase under the National Recovery Plan, which would allow more lively economic activities,” he added.
iFast Research foresees the central bank holding the OPR unchanged and is expected to extend their accommodative monetary policy stance further with the first rate hike postponed from the third quarter of 2022 (3Q22) to 4Q22 to aid the post-pandemic economic recovery.
It said the prolonged Covid-led disruption might alleviate towards the end of the year due to continued operations of essential services, higher adaptability to remote work and increased automation and digitisation.
“Further to that, the gradual economic reopening under NRP would revitalise economic activities, restore domestic consumption, business operations, exports and imports, and thereby underpin the recovery in 4Q21 and beyond.
“With an eventual economic recovery in sight, we opine there is less incentive for BNM to pursue a rate cut at this juncture as the marginal benefit of a rate cut has diminished,” iFast noted.