BNM expects to keep OPR unchanged; first rate hike likely in 4Q 2022

IN the upcoming Monetary Policy Committee (MPC) meeting scheduled to take place tomorrow (Sept 9), iFAST Research expects Bank Negara Malaysia (BNM) to maintain the status quo overnight policy rate (OPR) at 1.75%. All 22 economists surveyed by Bloomberg share the same view.

Slower domestic economy

Despite a faster than expected 16.1% year-o-year (yoy) growth in 2Q 2021, BNM slashed Malaysia’s full year 2021 gross domestic product (GDP) growth forecast to 3%-4% from its previous estimate of 6%-7.5%.

The central bank alluded to the re-imposition of movement control order (MCO) as a key factor that would weigh on economic growth in 2H 2021.

That being said, we expect the prolonged COVID-led disruption to alleviate towards year end due to continued operations of essential services, higher adaptability to remote work and increased automation and digitalisation.

Further to that, the gradual economic re-opening under National Recovery Plan (NRP) would revitalise economic activities, restore domestic consumption, business operations, exports and imports, and thereby underpin the recovery in 4Q 2021 and beyond (see Figure 1).

With an eventual economic recovery in sight, we opine that there is less incentive for BNM to pursue a rate cut at this juncture as the marginal benefit of a rate cut has diminished.

Tepid inflation keeps rate hikes at bay

After spiking in April and May, inflation numbers have tapered down in June and July after the low base effect have worn off.

This is in line with our view that the inflation spikes are most likely temporary due to the low base effect caused by the deflation in prices one year ago and that the recent inflation spikes are mainly due to cost push stemming from higher commodity prices.

Going forward, we should see inflation remain tepid (see Figure 2) amid weak domestic demand and slow economic recovery. As such, we believe BNM does not have the urgency to raise rates in the short to medium run.

Accommodative monetary policy stance

Taking into account the recent slowdown in economic conditions and tame inflation outlook, we foresee BNM to maintain the OPR at the current rate of 1.75% during the upcoming MPC meeting.

Furthermore, we expect BNM to extend their accommodative monetary policy stance further with the first rate hike postponed from 3Q 2022 to 4Q 2022 in order to aid the post-pandemic economic recovery (see Figure 3).

Pre-pandemic level yields

Back in 2Q 2021 as yields started to pick up back to pre-pandemic levels, we recommended investors to increase the duration of their Malaysian bond portfolios.

So far, investors who have followed the call would have done pretty well as bond yields have stabilised and traded sideways since (see Figure 4). In other words, bond investors would have been enjoying decent returns with little volatility.

Based on the aforementioned interest rate outlook and current level of yields, we continue to advocate medium to long duration Malaysia bonds which we think will continue to do well over the next 1.5 years.

On one hand, investors can enjoy pre-pandemic level yields and spreads which are pretty decent while on the other hand, only taking slightly higher duration risk which we also believe is rather limited as most of the hawkishness has been priced into the current yields already.

In particular, we find the lower grade segment A-rated or below very attractive as the yield pickup and spread are still very substantial compared to the spreads offered by AAA or AA-rated bonds.

In fact, this yield pickup and spread can help to cushion the portfolio amid any interest rate volatility as what had happened in February and March this year. – Sept 8, 2021

 

iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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