Bank Negara takes a breather with the OPR

PETALING JAYA: After four consecutive rounds of rate cut this year, Bank Negara has taken a breather from further monetary easing, keeping the overnight policy rate (OPR) unchanged.

The move, which was in line with market predictions, was deemed to be “appropriate and accommodative” by the central bank, given the country’s outlook for growth and muted inflation.

Bank Negara, however, hinted that it was ready to revise the benchmark interest rate in the future, if necessary.

“The bank remains committed to use its policy levers to create enabling conditions for a sustainable economic recovery.

“The cumulative 125-basis-point (bps) reduction in the OPR this year will continue to provide stimulus to the economy, ” it said in a statement.

Some economists, including Socio-Economic Research Centre (SERC) executive director Lee Heng Guie and Maybank IB Research’s economics team led by Suhaimi Ilias, (pic below) believe the OPR may only be raised gradually from the end of 2021 onwards.

Maybank IB Research described the move to retain the rate as a “dovish pause”.

Bank Negara’s Monetary Policy Committee (MPC) retained the OPR at 1.75%, underpinned by the economic recovery seen both in Malaysia and on the global front.

A Bloomberg poll earlier of 21 economists showed a median forecast of 1.75%, with only nine economists expecting a 25 bps drop in the OPR to 1.5%.

Bank Negara said the global economy continued to improve, with the easing of containment measures across more economies and strong policy support.

However, it also pointed out that the outlook was still subject to downside risks and uncertainty, primarily due to the risk of a resurgence of the pandemic and weaker labour market conditions.

On the domestic front, the central bank said economic activity continued to recover from the trough in April this year.

“Latest indicators show that labour market conditions, household spending and trade activity have continued to improve. Also supporting the economic recovery are the fiscal stimulus packages, besides monetary and financial measures.

“The improvement is expected to continue into 2021, thanks to the recovery in external demand and expansion in private sector expenditure.

“However, the pace of recovery will be uneven across sectors, with economic activity in some industries remaining below pre-pandemic levels, and seeing a slower improvement in the labour market, ” it said.

Despite the recovery trend, Bank Negara cautioned that the outlook remained subject to risks, particularly from uncertainties surrounding the course of the pandemic domestically and globally.

As for inflationary pressures, Bank Negara expects headline inflation is likely to average negative in 2020, given the substantially lower global oil prices, and average higher in 2021, within the earlier projected ranges.

“The outlook, however, will continue to be significantly affected by global oil and commodity prices. Underlying inflation is expected to be subdued amid spare capacity in the economy, ” it added.

SERC’s Lee said he concurred with Bank Negara’s assessment of the economy.

While risks remain, he sees no immediate need to lower the borrowing costs as economic data point towards gradual recovery.

“Bank Negara has already front loaded the rate cuts as it slashed the OPR by 125bps earlier this year, ” he told StarBiz.Lee said Budget 2021, which will be tabled in November, would be a key focus for the economic recovery.

“It will be an expansionary budget, but in a very targeted way. As the debt ceiling was increased recently, this allows more room for an expansionary budget, ” he said.

Meanwhile, OCBC economist Wellian Wiranto said that with the OPR retained at 1.75%, it appeared that Bank Negara is “comforted enough by how well the economy has healed from the pandemic damages, to take the view that households and businesses would not have any big issue servicing their loans again come October”.

“Given the telling tilt towards a holding pattern, it appears that Bank Negara will not be in a big hurry to ease rates further in the near term, unless the outlook turns unexpectedly gloomier, ” he said in a note.