Rate cut this year ‘sooner rather than later’
KUALA LUMPUR: While the Overnight Policy Rate (OPR) was kept unchanged on Wednesday, some parties believe the domestic monetary policy needs to be loosened sooner rather than later.
The team at RHB Investment Bank Bhd (RHB Research) maintained its view that Bank Negara Malaysia (BNM) will cut the OPR by 25 basis points (bps) to 1.5 per cent at the March 4, 2021 policy review.
It said the risks are tilted towards another 25bps cut in the second quarter (2Q21).
“The central bank will await the release of December CPI data on January 22, December trade data on January 29, December industrial production on February 8, and 4Q20 Gross Domestic Product (GDP) on February 11 in order to assess the impact of the second movement control order (MCO 2.0) before it decides to cut the OPR by 25bps,” it added.
It believed the monetary policy needs to be loosened since we believe the government’s 2021 development expenditure programme of RMR148 billion “is too optimistic and the overall the fiscal impulse to the economy will be limited in 2021.”
“We also believe the recent announcement of fiscal stimulus on January 18 by the government helps to partially offset some near-term downside pressures on private consumption, but not much,” it added.
“In our view, the recent data releases suggest that the economy has started to weaken considerably and this trend will continue for much of 1H21. Our 2021 GDP growth forecast is maintained at 5.4 per cent year on year versus the Bloomberg consensus forecast of 6.8 per cent.”
UOB economist Julia Goh interpreted BNM to be in a ‘waitand-see’ mode.
“Overall, BNM kept their view that the “current monetary policy stance to be appropriate and accommodative” alongside optimism that conditions are expected to improve from 2Q 2021. This would suggest that rates could stay on hold from here,” she said in her opinion piece.
“However, we note renewed caution, whereby BNM said that “given uncertainties surrounding the pandemic, the stance of monetary policy going forward will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.”
“In other words, we think BNM is in a “wait-and-see” mode. We foresee a high chance that the current MCO 2.0 could be extended. The tighter MCO has also been expanded to almost the whole nation, except for Sarawak since late last week.
“Given the possibility of further extension of the current containment measures and potential downside risks, we maintain our view for a 25bps OPR cut to a new low of 1.50 per cent in 1Q21.”
OCBC Treasury Research economist Wellian Wiranto concurred as well.
“Comparing our baseline outlook and apparent probabilities attached to these downside risks, it appears that we just see things less rosily. A recovery is coming, indeed and in large part driven by the start of vaccination efforts especially in major economies,” he said in referring to BNM’s comments.
“But we see the ongoing challenges of case resurgence hurting things more – even if a lot less than in 2020 – and we have probably attached a lower probability of a smooth vaccine rollout.
“Hence, all in all, we still see further easing in the OPR by the BNM, likely in 2Q when economic prints start to shift less decisively upward than anticipated.”