BNM to maintain OPR amid rising COVID-19 cases, slow vaccine roll-out

By iFAST Research Team

 

IN May 2021, iFAST Research expects Bank Negara Malaysia (BNM) will maintain the status quo Overnight Policy Rate (OPR) at 1.75%. According to Bloomberg estimates, all 20 economists surveyed indicated that BNM will maintain the OPR at 1.75%.

Growing number of COVID-19 cases

The growing number of COVID-19 cases over the past month has led to some level of movement restrictions tightening being priced in with measures expected to be announced by the government in the upcoming days. The slower-than-expected vaccine roll-out has also added to growing concerns for the need of tighter movement restrictions.

Should mobility be curtailed, consumer spending is likely to soften further while businesses are expected to remain cautious on capital expenditure. This in turn would put a dent on the 2021 growth rebound that is expected to range between 6% to 7.5%, according to various estimates.

Figure 1: New COVID-19 cases in Malaysia (daily)

 

Strong manufacturing numbers

While the rising COVID-19 numbers and a potential movement restriction order (MCO) appear on the cards (which in the past has led to easing monetary policies to spur growth), Malaysia’s strong manufacturing numbers in April suggests a reduction in the likelihood of further easing.  Malaysia’s Purchasing Managers’ Index (PMI) rose to 53.9 from 49.9 in March according to independent data provider IHS Markit.

According to IHS Markit, the rise in PMI points to a robust improvement in the manufacturing sector on the back of increasing consumer confidence. The data registered in April underlines a growth output for the first time in nine months. The strong manufacturing numbers provides a buffer and reduces the likelihood for further easing monetary accommodation in Malaysia.

Inflationary pressure remains tepid

The spike in consumer headline inflation of 1.7% in March – the highest rate since January 2018 –might suggest that inflationary pressure is present in the economy. That being said, we believe these are most likely temporary due to the low base effect from last year.

Despite the increase in commodity prices such as oil, steel, copper and lumber to name a few, the consumer demand conditions in the country remains soft which should keep consumer headline inflation numbers manageable in the upcoming months. This in turn should reduce the urgency of BNM to raise rates in the short run. 

Conclusion

Balancing the rising number of COVID-19 cases, the slower-than-expected vaccine roll-out, and a potential movement restriction order on the cards against the strong manufacturing numbers and manageable inflationary pressure, we foresee BNM to remain accommodative in its monetary policy and maintain the OPR rate at the current rate of 1.75%. – May 5, 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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