Posted Date: September 13, 2021

In a Monetary Policy Statement (MPS) released on September 9, 2021, Bank Negara Malaysia (BNM) decided to hold the overnight policy rate (OPR) unchanged at 1.75%. This is in line with our expectations. The MPS signalled no imminent changes in the OPR, which has been at a record low since May 2020.

BNM's latest assessment on the outlook was essentially unchanged from the previous Monetary Policy Committee (MPC) statement, despite the latest developments. The government plans to treat COVID-19 as an endemic. This implies a policy shift from the current approach of imposing lockdown measures to curb the spread of the pandemic. Malaysia's vaccination progress is impressive, where more than 50% of the population has been fully inoculated. BNM expects the further easing of containment measures, rapid progress of the domestic vaccination programme and continued expansion in global demand will support the growth momentum going forward. However, there is a risk where booster shots might be needed to elevate the efficacy rate of vaccines to combat mutations of the virus.

BNM projects headline inflation to average between 2.0% to 3.0%; year-to-date, it has averaged at 2.3%. The spike in headline inflation is mainly driven by issues related to the base effect and supply chain, although these issues are likely to be transitory. Underlying inflation is expected to remain muted as BNM anticipates core inflation to average in the range of 0.5% and 1.5% for 2021 amid continued spare capacity in the economy. The capping of oil prices will tame any sudden spike in inflation as well. These factors provide comfort for BNM to maintain the OPR at a low level, giving breathing space for the economy to rebound.

With major central banks rates on hold, we believe that further rate cuts are unlikely this year. We caution that some capital may start to flow out from emerging markets, including Malaysia, towards US dollar-denominated assets. This scenario is likely as the US Federal Reserve signalled to embark on rate normalisation earlier than expected. In turn, the ringgit has weakened by 2.9% since the beginning of the year amid a stronger greenback.

We opine that the current monetary settings are sufficiently accommodative and justified to support the recovery. The outlook remains overshadowed by downside risks. BNM cites potential delays in easing or re-imposing broad-based containment measures due to the impact of new variants and weaker-than-expected global growth recovery.

By the next MPC meeting in early November, we expect the Malaysian economy to enter the subsequent phase of the National Recovery Plan amid gradual reopening. This prospect will eventually see an uptick in private consumption and investments, leading to a more robust path towards recovery. However, we remain cautious of the possibilities of rehiring as firms remain on guard of possible reimposition of a lockdown in view of new COVID-19 variants. We expect the following MPS to provide more clues as to how the central bank would tackle rate normalisation in the coming year.

That said, we believe that the unemployment rate will remain elevated for a while longer. Recovering all lost jobs in hard-hit sectors such as the tourism and aviation industry is ambitious in the short run. We expect BNM to maintain the OPR through at least the end of 2021 before normalising rates in mid-2022.

The full report can be accessed here.

Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my;
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my;
Lyana Zainal Abidin, +603-2717 2912/ norlyana@marc.com.my.