PETALING JAYA: Ahead of Bank Negara Malaysia’s (BNM) Monetary Policy Committee on Tuesday, analysts are of the view that there is still a possibility of a further trim to the key interest rate.
The Overnight Policy Rate (OPR) is currently at a historic low, following the central bank’s efforts to mitigate the economic impact seen from the Covid-19 pandemic. Year to date, the OPR has been slashed four times by a total of 125 basis points (bps) – from 3% on Jan 2 to 1.75% on July 7.
However, the rate was left unchanged at the latest MPC meeting in September, partly due to economic activity continuing to recover from the trough in April, supported by fiscal packages, monetary and financial measures.
AmBank Research chief economist Anthony Dass laid out two potential scenarios: either BNM further reduces the OPR, or it does not.
He opined that a further trim to the benchmark interest rate will help support the economy. This is because despite the recent set of data pointing to a positive outlook, the downside risk on the economy has somewhat picked up following a rise in Covid-19 cases and a targeted conditional movement control order (CMCO).
As they affect Kuala Lumpur, Selangor and Putrajaya – three zones which account for slightly more than 40% of the national gross domestic product (GDP) and around 35% of the country’s establishment of SMEs – these measures have seen manufacturing output easing and orders turning flat.
At the same time, the CMCO will have a knock-on effect with the services sector.
“Budget 2021 that will be unveiled on 6 November plays a crucial role. With the recovery being uneven across the sectors, the budget is expected to be big. The deficit is likely to be around 5.5%-6% of the GDP.
“Its aim is to continue supporting the economic recovery from the adverse impact of the pandemic virus. Hence, the monetary policy will also need to play a crucial role. A 25bps cut during the November MPC meeting with a high of 50bps from the current OPR of 1.75% would augur well for the economy’s recovery,” said Dass.
CGS CIMB Research also believes BNM will decide to lower the OPR for the final time this year by 25bps to 1.5% to provide further monetary stimulus.
This came after the release of September trade data, which showed a surge in exports and a narrowing of annual losses from imports. However, the research house said the uptick in Covid-19 cases and the CMCO in Selangor, Kuala Lumpur and Sabah dents the recovery in domestic demand.
“Political uncertainty and social distancing curbs could cool consumer and business sentiment, with downside risks in the near term to the recovery in imports of consumption goods and capital goods,” it noted.
However, UOB Research expects the OPR to remain at its current level, as BNM’s lower bound of GDP projections of - 3.5% to -5.5% for this year does assume downside risks including a setback in global growth, a prolonged Covid-19 outbreak, and targeted MCO in high-risk areas.
“Moreover, we expect further fiscal support in the coming Budget 2021. BNM also has other policy levers that can be used to support the recovery,” it added.
If the OPR remains at the current rate of 1.75%, Dass said although there has been a large increase in the number of Covid-19 cases in the country, the spike only started in October and the subsequent implementation of a CMCO is unlikely to hurt the economy as severely as in the previous period.
“At the same time, the economy will be supported by the stimulus measures, added with Budget 2021 that will continue to focus on the economic recovery.
“Preliminary estimation suggests that the 3Q’20 GDP is most likely to fall between 2% and 3% year-on-year following a very steep 17% contraction in 2Q’20, the worst since the 1997 Asian financial crisis. And the domestic economy should continue to hold on well in 4Q’20. This would provide some breathing space for BNM to maintain its current 1.75% OPR during the MPC meeting,” he added.
Suorce: The Sun Daily