Nov MPC: OPR maintained at 1.75%

  • BNM’s decision to maintain the OPR at 1.75% was in line with expectation, amid easing strains on real GDP due to relaxation in movement restrictions.
  • Concerns over downside risks to the growth outlook, against the expectation of subdued underlying inflation, suggest a gradual normalisation cycle.
  • We expect BNM to begin rolling back its monetary policy only in 2H22F, projecting two 25bp rate hikes to bring end-2022F OPR to 2.25%.

OPR maintained at 1.75% for the eighth straight meeting

Bank Negara Malaysia (BNM) kept the overnight policy rate (OPR) at 1.75% in its final Monetary Policy Committee (MPC) meeting of the year, in line with our and market’s expectations.

Cautiously optimistic on Malaysia’s economic recovery

The MPC statement that accompanied the decision noted that economic activity has recovered from the trough in Jul, driven by high vaccination coverage allowing all states to transition to either Phases 3 or 4 of the National Recovery Plan (NRP). The
manufacturing PMI rose to 52.2 in Oct, exceeding the 50-mark for the first time in six months, pointing to a firm rebound in the manufacturing sector, while trade activity remained robust with double-digit growth in exports and imports in the past six months
amid favourable commodity terms of trade and external demand. Policymakers expect Malaysia’s growth momentum to improve going into 2022, underpinned by external demand, higher private sector expenditure in line with the resumption of economic
activity, and continued policy support. Core inflation is expected to increase from <1% in 2021, in line with the resumption of economic activity, but remain benign due to continued spare capacity in the economy and slack in the labour market. Nevertheless, the committee noted some upside risk from the prolonged supply-related disruptions and global commodity price developments.

Patience in unwinding monetary policy support

Last Friday, the Ministry of Finance (MOF) unveiled an expansionary budget to bolster economic recovery, with fiscal deficit targeted at 6.0% of GDP for 2022 (vs. 6.5% of GDP for 2021). Nonetheless, the MPC continued to take a cautious stance, highlighting that risks to the growth outlook remain tilted to the downside, driven by risk factors such as weaker-than-expected global growth, worsening supply chain disruptions, and the reimposition of containment measures due to the impact of new Covid-19 variants of concern. As such, the MPC viewed the current monetary settings as “appropriate and accommodative,” and the monetary policy stance continues to be data dependent, suggesting that the MPC will be patient in scaling back monetary support. Hence, we expect monetary policy normalisation to begin only in 2H22F and project two 25bp OPR hikes (rather than three hikes as previously projected), to bring the OPR to 2.25% by end- 2022F.