Less pressure for BNM to cut rate at 2021’s first MPC meeting, say economists

Less pressure for BNM to cut rate at 2021’s first MPC meeting, say economists
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KUALA LUMPUR (Jan 19): Economists see less pressure for Bank Negara Malaysia (BNM) to cut its overnight policy rate (OPR) at the Monetary Policy Committee (MPC) meeting tomorrow — its first for the year, following the announcement on the RM15 billion Perlindungan Ekonomi dan Rakyat Malaysia (PERMAI) assistance package by the government yesterday.  

JP Morgan economist Milo Gunasinghe said in a note today that while the risk of a cut has increased, he expects the central bank to remain on hold this week given the relief measures announced, the short duration of movement control order (MCO) restrictions and a limited policy rate transmission mechanism.

“We think BNM will keep the OPR on hold at 1.75% this week, following the 125 basis points (bps) in cumulative cuts in 2020,” he said.  

According to him, there are several reasons for BNM to remain on hold.

Firstly, the MCO could trim 0.5 percentage point (ppt) to 0.8 ppt of 2021 gross domestic product (GDP) growth. Nevertheless, it was still short-dated in nature as of the time of writing, and businesses and consumers are now arguably more adept at operating under the new normal versus previous restrictions, he noted.

Secondly, he said, the PERMAI assistance package and measures in Budget 2021 are expected to support consumption.

“Both of these measures support our narrative that the overall economic trend remains one of an uneven path to recovery,” he added.

Thirdly, the transmission mechanism for additional policy rate cuts, and therefore the purpose of such cuts, is likely to be limited given the variety of credit relief measures and moratoria currently in place, he added.

CGS-CIMB economists Michelle Chia and Lim Yee Ping also said in a note today that with the fiscal resources deployed, BNM may adopt a wait-and-see approach at its MPC meeting tomorrow, maintaining its current monetary policy stance while signalling strongly that it stands ready to ease further should risks to the economic recovery fester.

“As such, we expect BNM to maintain the OPR at 1.75% in January.

“Should the MCO 2.0 persist for a protracted period, we see the possibility of the central bank cutting the OPR further in 1H21 (the first half of 2021),” they said.

According to them, the swift announcement of fiscal support yesterday provided some “short-term reparation” to affected households and businesses, though it did not completely offset the downside risk to the economic outlook.

Meanwhile, RHB Research Institute (RHBRI) chief economist Dr Sailesh K Jha and senior economist Ahmad Nazmi Idrus also said in a note today BNM could remain on hold tomorrow since the government had announced a relief package, and it could await consumers and businesses' response to the policy package.

However, they expect the BNM to cut the OPR by 25bps to 1.5% in the first quarter of 2021 (1Q21).

“The risks are tilted towards another 25bps cut in 2Q21,” they said.

According to RHBRI, monetary policy loosening is needed since the momentum of growth will weaken significantly in 1H21 against the backdrop of the government infrastructure programme which is likely to surprise on the downside in 2021.

The economists opined that the central bank will await the release of December’s economic data, namely the Consumer Price Index (CPI), trade, industrial production and 4Q20 GDP in order to assess the impact of MCO 2.0 before it cuts the OPR by 25bps at the March 4 policy meeting.

“In 2Q21, if additional fiscal stimulus measures are not announced by the government or global growth doesn't pick up significantly, we believe the risks are skewed toward another 25bps cut by the central bank,” they said.

UOB Economics and Market research economists Julia Goh and Loke Siew Ting, also highlighted in its note today, that the pressure to ease may be lesser with the latest assistance measures and government’s assessment that the economic impact from current MCO is more manageable.

They, however, still pencilled in a 25bps OPR cut to a new low of 1.50% in 1Q21.

After the MPC meeting tomorrow, the next policy review is scheduled for March 4.

Affin Hwang Capital’s chief economist Alan Tan also said in a note today, he believed BNM to maintain its OPR at 1.75% tomorrow.

“As BNM has lowered its OPR by a total of 125bps last year, from 3.0% to 1.75%, we believe BNM will likely view the current level as appropriate and accommodative to provide further support to domestic demand,” he said.

He also noted that measures under the PERMAI package such as BPN 2.0, BPR and Wage Subsidy Program 3.0 should cushion some of the negative economic effects of the current MCO.

“[The] government also noted that the current MCO sees more economic activities being allowed to operate, and therefore does not have the same drag on the economy as the previous MCO in 2Q20,” he added.

Joyce Goh and Jenny Ng