KUALA LUMPUR, Sept 10 — Bank Negara Malaysia (BNM) is likely to be patient in tightening its monetary policy given the bumpy road towards recovery so far, which includes the recent downward revision of the 2021 economic growth projection to 3.0 per cent-4.0 percent, said CGS-CIMB Securities (CGS-CIMB).
Malaysia’s gross domestic product (GDP) growth was previously projected to be between 6.0 percent and 7.5 percent in 2021.
In a note, CGS-CIMB said it expects monetary policy normalization to begin only in the second half of 2022 (2H2022), premised on expectations of two-quarters of sequential economic gains after all states move into Phase Four of the National Recovery Plan by Q4 2021.
On Thursday, BNM announced that it has maintained the overnight policy rate (OPR) at 1.75 percent, in line with market expectations.
“Gradual economic re-opening, along with continued fiscal and financial support, implies the OPR will most likely stay at the current level until year-end,” said CGS-CIMB, noting that the last Monetary Policy Committee (MPC) for the year is scheduled to be held on Nov 2-3.
Meanwhile, Moody’s Analytics economist Denise Cheok said core inflation is expected to remain subdued due to weak consumer spending, allowing the central bank to keep its rates low into 2022.
“This is crucial because the country is running out of fiscal space.
“Malaysia is fast reaching its statutory debt ceiling of 60 percent of the GDP, and the new government has proposed raising this limit to 65 percent to allow for further spending,” she added.
Although a higher statutory debt limit would provide some short-term relief, Cheok said additional fiscal packages would likely be less generous than those announced last year.
“Weak labor market outlook will keep consumer spending tepid, although we might see some return to growth towards the beginning of next year.
“In the meantime, the monetary policy is expected to remain accommodative while the economy gradually gears up to speed,” she added.
Public Investment Bank said economic momentum is set to gain more traction in 2H2021 following the lag impact of the expansionary fiscal and monetary strategy.
Overall sentiment will also be shored up by the rapid COVID-19 vaccination drive, with the nation on track to transition towards full economic openings in early fourth quarter of this year, it added.
The investment bank said downside risks may come from a resurgence in COVID-19 infections that could push targeted containment measures to continue, adding that the emergence of vaccine-immune COVID-19 strain is another worry as it could cause the infection rate to remain high.
“The impending start of the United States-China trade talks is also a concern as that could hurt demand for manufacturing goods, no thanks to the uncertainty over tariff and non-tariff measures.
“Policy surprises by major economies could also hurt our prospects,” said Public Investment Bank.