MNI Bank Negara Malaysia - May 2021
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MNI Bank Negara Malaysia – May 2021
Announcement Date: Thursday, 6 May 2021
Announcement Time: 08:00 BST/15:00 MYT
Link To Rate Decision: https://www.bnm.gov.my/press-release-2021
MNI Point of View: OPR Seen On Hold Amid Virus Resurgence
Malaysia is battling the third wave of coronavirus, but Bank
Negara Malaysia are set to leave monetary policy settings
unchanged. Conventional ammunition is running dry, with
Overnight Policy Rate at the historical low of 1.75%.
Persistent uncertainties force Bank Negara to keep
monetary conditions accommodative, but some promising
signs in economic data rule out any further cuts for now.
Daily coronavirus infections have picked up across
Southeast Asia, with consecutive countries declaring first
cases of the infamous Indian variant. The variant has
already been detected in Malaysia, which is witnessing
another wave of new cases, prompting reaction from the
government. Earlier this week, officials tightened
restrictions in six districts across Selangor, the country’s
richest state surrounding Kuala Lumpur. Just a day later,
they announced that the capital is also being placed under
the so called Movement Control Order. At the same time,
however, Senior Minister Ismail Sabri and Science Minister
Khairy – the main duo responsible for managing the local
outbreak of Covid-19 – all but ruled out imposing
widespread (let alone nationwide) lockdowns. The
government seems inclined to continue applying targeted
curbs, while working on fiscal stimulus measures as the
immediate means of stimulating economic recovery.
Economic data since the last monetary policy meeting
have been net positive. Industrial output has been
picking up, even as the March reading came in slightly
shy of expectations. Exports have boomed, easily
topping projections in both February and March and
pushing trade surplus close to record highs. Finally,
consumer-price inflation accelerated to +1.7% Y/Y in
March, a pace last seen three years ago, although
core inflation was subdued and is expected to remain
so for now. While BNM has never adopted an explicit
inflation targeting framework, it is mandated to secure
price stability. Sustained recovery in CPI alongside
green shoots in other economic indicators provide a
solid argument for policymakers to stay away from
policy levers for now.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBThe MPC will weigh these positive signals about medium-term economic recovery and the accelerating rollout of
Covid-19 vaccines against the worrying resurgence of the virus. Going forward, Bank Negara are expected to stand
back and let fiscal policy take the main role in stimulating economic recovery, while focusing on macroprudential
improvisation. Today’s meeting is unlikely to rock the boat amid continued uncertainty surrounding the ongoing
pandemic, albeit concern with the current wave of the virus may nudge policymakers to emphasise downside risks
to the outlook.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBBank Negara Malaysia March Monetary Policy Decision:
At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the
Overnight Policy Rate (OPR) at 1.75 percent.
The global economic recovery, while uneven, is gaining momentum, supported by steady improvements in
manufacturing and trade activity. The ongoing roll-out of vaccination programmes in many economies, together
with policy support, will further facilitate an improvement in private demand and labour market conditions. While
financial markets have experienced bouts of volatility, financial conditions remain supportive of economic activty.
Risks to the growth outlook have abated slightly, but remain tilted to the downside, primarily due to uncertainty over
the path of the COVID-19 pandemic and effectiveness of the vaccination programmes.
For Malaysia, latest indicators point to improvements in external demand and continued consumer spending. While
the re-imposition of containment measures will affect growth in the first quarter, the impact is expected to be less
severe than that experienced in the second quarter of 2020. Going forward, growth is projected to improve from the
second quarter onwards, driven by the recovery in global demand, increased public and private sector expenditure
amid continued support from policy measures and more targeted containment measures. Growth will also be
supported by higher production from existing and new manufacturing facilities, particularly in the E&E and primary-
related sub-sectors, as well as oil and gas facilities. The roll-out of the domestic COVID-19 vaccine programme will
also lift sentiments and economic activity. The growth outlook, however, remains subject to downside risks,
stemming mainly from ongoing uncertainties in developments related to the pandemic, and potential challenges
that might affect the roll-out of vaccines both globally and domestically.
Headline inflation in 2021 is projected to average higher, primarily due to higher global oil prices. In terms of
trajectory, headline inflation is anticipated to temporarily spike in the second quarter of 2021 due to the lower base
from the low domestic retail fuel prices in the corresponding quarter of 2020, before moderating thereafter.
Underlying inflation is expected to remain subdued amid continued spare capacity in the economy. The outlook,
however, is subject to global oil and commodity price developments.
The MPC considers the stance of monetary policy to be appropriate and accommodative. Given the uncertainties
surrounding the pandemic, the stance of monetary policy going forward will continue to be determined by new data
and information, and their implications on the overall outlook for inflation and domestic growth. The Bank remains
committed to utilise its policy levers as appropriate to foster enabling conditions for a sustainable economic
recovery.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBMonetary and Financial Developments in March 2021
Headline inflation increased to 1.7% in March
• Headline inflation increased to 1.7% in March (February: 0.1%).
• The main contribution to the higher headline inflation was the base effect from low domestic retail fuel
prices in the corresponding period last year (RON95 petrol prices: March 2021: RM 2.05/ litre; March 2020:
RM 1.74/litre). This base effect is expected to remain in the second quarter of 2021 and dissipate
thereafter.
• Underlying inflation, as measured by core inflation, remained stable at 0.7%.
Higher IPI in February driven by manufacturing
• Overall IPI improved slightly in February to 1.5% (January: 1.2%), as higher manufacturing production
more than offset further contraction in the mining production and electricity generation.
• The E&E industry recorded double-digit growth of 10.3% (January: 7.9%) driven by global demand from the
tech-upcycle. Manufacturing activity was also supported by the healthcare segment, namely from rubber
based and pharmaceutical products.
Continued growth in net financing
• Net financing expanded at 4.5% reflecting the increase in outstanding corporate bond growth (March:
5.9%, February: 4.5%) and outstanding loan growth (March: 3.9%, February: 3.7%).
• Outstanding household loan growth increased to 5.7% (February: 5.1%). Higher loan disbursements were
recorded for the purchase of cars and residential properties.
• For businesses, outstanding loans grew at 1.1% (February: 1.0%). During the month, higher loan
disbursements and repayments were observed across most sectors and purposes.
Domestic financial markets were affected mainly by external developments
• In March, domestic financial markets were affected by external factors, particularly the rise in long-term US
Treasury yields, which reached its highest level for the year at the end of the month amid higher growth
and inflation expectations in the US.
• Consequently, the US dollar also strengthened which led to a broad-based weakening of other advanced
and emerging market currencies against the US dollar. During the month, the ringgit depreciated by 2.6%
against the US dollar while the 10-year MGS yield increased by 18.3 basis points.
• The FBM KLCI declined marginally by 0.3% as bond yields surged and investor sentiments were affected
by lingering uncertainties surrounding the path of the pandemic globally and expectations for a faster US
monetary policy tightening.
Ample liquidity in the banking system amid stable funding conditions
• Banking system continued to maintain healthy liquidity buffers with the liquidity coverage ratio (LCR)
remaining strong in March 2021 (February: 147.1%).
• Banks’ funding profile also remained stable amid sustained strong growth in retail deposits.
Sound risk management practices by banks will support asset quality in the period ahead
• Overall gross and net impaired loans ratios were broadly sustained at 1.6% and 1.0%, respectively.
• Banks continued to set aside additional provisions against potential credit losses, which currently stand at
1.8% of total banking system loans.
Click here to see the full press release with accompanying charts here.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBSell-side comments:
ANZ: We expect Bank Negara Malaysia (BNM) to keep the policy rate unchanged at 1.75% while continuing with
its accommodative stance. Since the beginning of April, Malaysia’s COVID-19 situation has been worsening. The
recent spike in daily new cases is worrying. Given a rising pandemic burden, there is a risk that activity restrictions
will be brought back, after a gradual easing over March. The attendant impact on activity will mean further bumps
along the path of domestic demand recovery. High frequency indicators, such as Google mobility metrics, continue
to highlight the stress on activity from a worsening pandemic. After an improvement in March, mobility metrics are
weakening again. This will in turn impact economic indicators. However, we note that the export upswing has been
the saving grace for growth, buoyed by resilient global demand for tech-related goods. We expect a robust net
exports contribution to GDP growth over 2021. Malaysia’s CPI inflation has inflected as well, and is now set to
accelerate. However, much of it is due to low base effects from last year. Amid headwinds to domestic demand
recovery, the actual month-on-month increase in prices will likely be limited. That said, higher global commodity
prices are expected to feed into the volatile components of CPI, such as food and transport. Core inflation,
however, may take longer to rise meaningfully. As such, inflation remains a non-issue for monetary policy. Amid a
deteriorating pandemic situation and rising downside risks to growth, stronger policy support will be required. But
that from conventional monetary policy may have been maxed out. At 1.75%, the nominal policy rate is at a
historical low and further rate cuts are unlikely to yield substantial benefits. We therefore expect Bank Negara
Malaysia to keep the rates on hold at its upcoming meeting, while maintaining an accommodative stance. Instead,
we expect fiscal policy to do the heavy lifting for growth.
Barclays: Rising COVID-19 infections in Malaysia mean its central bank will be reluctant to change rates, in our
view. We think BNM is more focused on the vaccination programme’s ability to secure the recovery in the medium
term, especially given fears that further rate cuts could exacerbate financial stability risks. In addition, a likely surge
in headline inflation over the near term provides another reason to keep rates on hold. However, BNM is unlikely to
embark on a path of policy normalisation either, as travel activity remains substantially below prepandemic levels.
We expect BNM to begin a gradual normalisation of the policy rate only in Q2 22, hiking by 50bp through the whole
of next year.
Citi: We expect the monetary policy to remain an accommodative, extended pause through 2021E, with: (i) risks
still tilted to the downside, (ii) output gap (although narrowing) is likely to remain negative through year-end, (iii)
additional fiscal support constrained by persistent ratings pressure, and (iv) desire to relief debt service burdens of
households.
Goldman Sachs: We expect Bank Negara Malaysia (BNM) to keep the overnight policy rate unchanged at 1.75%
at its meeting next week. In its economic and monetary review report, the central bank projected a strong 2021
rebound, with growth expected to be between 6% to 7.5% after contracting 5.6% last year. While stricter
containment policy in Q1 did have some growth impact, data seems to suggest a much smaller hit to GDP this time
around as many businesses could still operate normally and consumers moved transactions to digital platforms.
Given the recovering economy and higher headline inflation on the back of rising transportation costs and
unfavorable base effects, we expect BNM to keep policy rates unchanged this year. While the economy still has
significant spare capacity currently, a closing output gap – on normalizing activity in consumer facing sectors,
strong external and semiconductor demand and a positive terms of trade impulse – and rising core inflation
pressures next year, could create enough momentum for some policy tightening in 2022.
Morgan Stanley: We expect BNM to stay on hold at the upcoming MPC meeting next week. Recall that BNM has
eased by 125bps last year to support growth. Going forward, we do not have further rate cuts penciled into our
base case, as we expect a sustained cyclical recovery. In particular, while the latest Covid-19 flare-up would pose a
temporary setback to domestic demand, we don’t think this would derail the growth recovery we envisage in our
base case. Indeed, policymakers have gradually relaxed the containment measures, with most parts of Malaysia
(except selective districts in Kelantan) reverted back to the less stringent conditional/recovery movement control
order. In addition, we think the private sector has likely adapted its behavior to the Covid-19 new normal, and the
ongoing vaccine rollout should also help to reduce private sector risk aversion. Furthermore, Malaysia’s exports
have already recovered back to pre-Covid-19 levels, and we think the improving global environment and an
accommodative policy stance would lend further support to growth.
OCBC: After the apparent success in taming down the “3 rd Wave” early this year, the country is facing a potential
successor surge yet again. Against this backdrop, BNM is meeting this week on May 6th. While we and the market
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBdo not expect the central bank to cut its OPR on balance – it held rate unchanged during the previous virus
resurgence in January – there remains a small tail risk that it might just do so. 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.
TD Securities: BNM is likely at the bottom of its easing cycle. Malaysia is facing increasing COVID cases and
tighter restrictions, constraining activity. While domestic growth risks are rising, external trade is strengthening.
Fiscal policy continues to play a strong role in recovery, with BNM likely to focus on macroprudential measures
rather than policy rates.
UOB: According to the Bloomberg survey (as of 30 Apr), all the 6 economists polled expect BNM to keep its policy
rates unchanged at 1.75%. The resurgence in COVID-19 infections and re-tightening of selective containment
measures in the country in April reinforce labour market slack and bumpy economic recovery in 2Q21. Underlying
inflation remains muted with core inflation staying below 1.0% level for six months. As such, we expect BNM to
keep interest rates on hold while continuing to monitor developments of the pandemic and coordinate with the
government on a more targeted fiscal approach.
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