All eyes on interest rates


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PETALING JAYA: With the country expected to see some knock-on effects from the recently-announced targeted movement control order (MCO) in six districts of Selangor, all eyes are on Bank Negara’s decision on the overnight policy rate (OPR) today.

Economists said that it is still premature to cut interest rates at this juncture as the current OPR of 1.75%, which is already at a record low, is adequate to support the ongoing economic recovery.

In addition, given the return of inflation as seen in February and March this year, a reduction in OPR may not be favourable in dealing with price pressures in the coming months.

According to a Bloomberg survey among economists, the median forecast for the OPR is expected at 1.75%.

Speaking with StarBiz, AmBank group chief economist Anthony Dass (pic below) did not entirely discount the possibility of a rate cut this year, but said that this should only be done if a stricter and expansive MCO is announced for more locations due to worsening Covid-19 cases.

For now, he said a reduction in the OPR was unnecessary.

“The data shows us that the economy is picking up.

“The retail businesses, especially the small and medium enterprises, have been seeing improving sales.

“Meanwhile, the trade performance has also been growing stronger amid the improving global economy, and the commodity prices have provided support to domestic economic recovery, ” he said.

Dass added that Malaysia is supported by the recovery in foreign direct investments, especially the high-quality ones that would further boost the domestic labour market sentiment.

“Under such circumstances, the OPR is already at an accommodative level, ” Dass said.

MIDF Research economist Abdul Mui’zz Morhalim also expects Bank Negara to maintain the OPR at the current level of 1.75%.

He believes the central bank will put more emphasis on supporting the country’s economic recovery due to the uncertainty from the ongoing global pandemic.

“At the moment, we do not foresee any need for an OPR cut because the latest MCO restrictions are targeted for certain areas.

“However, if the general economic condition turns out to be worse than expected, we do not rule out the possibility of an OPR cut because Bank Negara still has room to cut the policy interest rate, ” he told StarBiz.

Recently, OCBC Bank and HSBC Global Research had also predicted the central bank to leave the benchmark interest rate unchanged.

HSBC Global Research chief economist for Asean Joseph Incalcaterra noted that Malaysia faces limited policy space, but said that Bank Negara “can count on manufacturing growth” to provide support to the economy and employment.

“Moreover, headline inflation is likely to continue rising in 2021 due to base effects and higher energy prices.

“While Bank Negara can look through this volatility, it nonetheless reduces the likelihood of further easing as the real policy rate buffer evaporates, ” according to Incalcaterra.

OCBC Bank economist Wellian Wiranto (pic below) pointed out that the central bank had avoided cutting the OPR during the previous virus resurgence in January, and hence feels that the rate may be retained.

Nevertheless, there remains a “small tail risk” for an OPR cut, stated Wellian.

“At the very least, it would start to flag some of the downside risks more vocally and signal that it continues to have some space for further accommodative policy if needed, ” he said.

The targeted MCO in several districts is expected to impact the pace of economic recovery.

AmBank Group’s Dass said that the manufacturing sector has been seeing a backlog of orders as demand starts to pick up.

“With the MCO 3.0, the backlog may worsen and this will have a knock-on effect on the economy.

“Initially, we projected the economy to grow by 18% to 19% in the second quarter of 2021. However, with the targeted MCO, the forecast may see a revision, ” he said.

Meanwhile, Dass said that it may take until 2022 for the Malaysian economy to return to pre-Covid-19 levels.

This is in contrast to Bank Negara’s expectation that the economy would reach pre-pandemic levels by mid-2021.

“The operating capacity of those sectors that have been adversely affected by the pandemic is currently at about 60%.

“So, it would take until next year for the recovery to be firmer, ” said Dass.

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