Bank Negara likely to begin raising OPR in 2021

Affin Hwang Capital Research chief economist Alan Tan (pic) said moving into 2021 there are chances for the central bank to raise its OPR, which currently stands at 2%.

PETALING JAYA: After three rounds of cuts in five months of this year, Bank Negara is unlikely to reduce its Overnight Policy Rate (OPR) further in 2020, according to Affin Hwang Capital Research chief economist Alan Tan.

Moving into 2021, Tan said there are chances for the central bank would begin raising its OPR, which currently stands at 2%.

“We expect Bank Negara to raise interest rates possibly by the second half of next year by 25 basis points.

“We will see some normalisation in policy rate because of the recovery in the domestic and global economy

“However, we are not going to see Bank Negara raising interest rates back to the 3% level anytime soon, ” he told reporters during a virtual briefing on the macroeconomic outlook for the second half of 2020 (2H20) yesterday.

For context, Bank Negara’s Monetary Policy Committee is scheduled to meet on July 6-7 to decide on whether there will be any changes to the OPR.

Tan said the Malaysian economy is set to recover in 2H20, although at a slow pace.

“The negative contraction in the gross domestic product (GDP) will be the sharpest in the second quarter of 2020 (2Q20). Second quarter GDP growth may even come in at a negative 9%, judging from the weak exports, productions and domestic demand.

He also expected that the contraction in economic growth would not turn positive anytime soon.

“GDP growth will remain in the negative territory in the third and fourth quarters, maybe at a smaller magnitude than the second quarter’s contraction, ” he said.

For the full-year 2020, he projected the domestic economy to contract by 3.5%.

This was despite the expectation of the Prihatin and Penjana stimulus packages to add about 3.4 percentage points to the 2020 GDP growth.

Tan was asked about the possibility for the government to announce more stimulus packages for the year.

In response to this, he said it is unlikely, although the government may embark on an expansionary Budget 2020, which will be tabled in November 2020.

“The Finance Minister has guided that the government is committed to lowering the fiscal deficit position back to 4% of GDP, but it will be done over the next three to four years.

“The minister understands that the coming Budget 2021 will still have to be expansionary to support the domestic economy, perhaps through continuation of development expenditure and perhaps cash assistance to the households, ” he said.

The country’s fiscal deficit to GDP is expected to touch 5.8% to 6% in 2020, as per the government’s official guidance. During the tabling of Budget 2020 last year, the government had forecast a fiscal deficit of 3.2%.

The fiscal deficit is expected to increase beyond the earlier target as the government will be directly injecting RM45bil for the stimulus packages announced earlier worth RM295bil cumulatively.

Meanwhile, Affin Hwang Capital Research senior associate director for research Loong Chee Wei, who spoke on the construction sector outlook, said the sector’s aggregate core earnings could likely fall by 13% year-on-year (y-o-y) in 2020 on slower progress billings and property sales.