Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at a historical low of 1.75% during its first Monetary Policy Committee (MPC) meeting of 2021. This was a prudent pause, in our view, as the resurgence of COVID-19 cases has triggered another round of the movement control order (MCO). This, in turn, will complicate the economy's recovery outlook in the short term. In its statement, BNM deemed that the current monetary settings, following the cumulative 125 bps OPR cuts in the previous year, remain appropriate and accommodative.
We believe that BNM's move to hold the present rate is justified. The central bank considers that the adverse impact of the re-introduction of the MCO will be impactful but less severe than that experienced in 2020. We concur with BNM's view and we are still bullish on a rebound if the MCO is lifted before 2Q2021.
We posit that MGS/GII yields will remain supportive and trending at record lows until the path towards a stronger recovery is clearer.
With the OPR on hold, we expect this to lend some support to the ringgit as the relatively high yields continue to attract foreign portfolio interest into the Malaysian bond market.
Furthermore, taking the cue from the PERMAI stimulus announcement on Monday, we believe that the present fiscal push through broad wage subsidies is adequate in addressing the elevated unemployment rate. The existing stimulus appears to be a suitable countercyclical measure towards recovery.
Externally, BNM expects the recovery in global demand to remain well supported from policy measures as well as higher production from existing and new manufacturing and mining facilities. The rollout of vaccines in the coming months will also lift sentiments. The International Monetary Fund (IMF) has projected a broad-based global recovery to 5.2% in 2021 from the low base of -4.4% in 2020. Malaysia's main trading partner, China, recorded a positive growth of 2.3% in 2020 and is expected the grow further to over 8% in 2021. This will lend support to Malaysia's relatively open economy.
In addition, inflation is expected to return to positive territory by end-1Q2021, which could drag down real interest rates. Market expectations of inflation have increased, as reflected in the gradual rise in long-dated yields.
BNM has been clear on the limitations of monetary policy to support growth. Banks could become extra cautious in their lending activities – which will act to limit the effectiveness of OPR cuts – given that lower interest rates will impact banks' net interest margin.
That said, BNM stressed that its monetary policy stance going forward will be determined by new data and information as well as their implications on the overall outlook on inflation and domestic growth. Furthermore, BNM reiterated that it remains committed to utilising its policy levers as appropriate to create enabling conditions for a sustainable economic recovery, indicating its willingness to do more. As such, we do not rule out the possibility that BNM will introduce other measures to help support the economy should downside risks emerge due to rising COVID-19 cases.