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Economists welcome Bank Negara’s rate cut pause

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PETALING JAYA: Economists view the decision by Bank Negara Malaysia’s (BNM) Monetary Policy Committee to retain the Overnight Policy Rate (OPR) at its record low of 1.75% as an indication that there has been sufficient action taken to accommodate the economy.

In a statement today, the central bank said it was maintaining the key interest rate at its current level, as economic activity continues to recover from the trough in April this year, with the improvement expected to continue into 2021, supported by the recovery in external demand and expansion in private sector expenditure.

“Inflationary pressures are expected to remain muted in 2020. 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,” BNM said.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said the MPC meeting outcome underscores the improvement in the Malaysian economy from its earlier trough in the second quarter which saw a 17.1% year-on-year contraction in gross domestic product (GDP).

“The frontloading of cuts to the key rate undertaken during the height of the movement control order (MCO) were accommodative, as the central bank has acted fast and provided relief to consumers. Coupled with the others measures taken, this limited the economic impact of the Covid-19 pandemic,” he told SunBiz.

Lee pointed out that the data suggested the worst has taken place in second-quarter 2020 and the latest high frequency data indicated that the subsequent quarters should see recovery, or at least a smaller contraction, in some of the worst-hit sectors.

Moving forward, he said, pandemic risk to the global economic recovery should be monitored.

The executive director also opined that the undertone of BNM’s statement suggested a pause in OPR cut at the MPC’s last meeting for the year in November, barring unforeseen circumstances.

Similarly, OCBC Treasury Research economist Wellian Wiranto said the central bank will not be in a hurry to ease rates further in the near term, unless the outlook unexpectedly turns gloomier.

“If everything goes swimmingly, as it appears to, in the coming months, it would hold its rate unchanged again at 1.75%, in the next and last MPC meeting for the year in November,” he said in a report.

Wellian said the economic recovery momentum that was taking hold in mid-August appears to have continued robustly enough for BNM to remain comforted that it does not require further mollycoddling in the form of more rate cuts in the near term.

He noted that the MPC statement points out that the “easing of containment measures across more economies”, together with policy support, has egged the recovery on. Even as the services uptick has been slower, the “reopening of production facilities has led to a resumption of manufacturing and trade activity”.

“Casting their gaze further out, the statement notes that ‘improvement is expected to continue into 2021, supported by the recovery in external demand and expansion in private sector expenditure’,” the economist said in a report.

“All in all, the statement suggests that the door remains open for easing in the future if necessary, but for now the easing that it has undertaken so far – with its cumulative 125 bps cut – is sufficient to help growth.”

With that, Wellian likened the central bank to a good doctor who sees no need in over-prescribing medicine if the patient is already recovering well enough on the existing mix.

Under that analogy, he said that the checkups will continue routinely from here, however, and if there is any indication that the patient’s conditions have turned for the worse, either because of unfavourable internal changes or unhelpful external conditions, the doctor would not hesitate to prescribe something stronger.

Bank Muamalat’s economist Izuan Ahmad elaborated that this decision could somewhat be driven by the current economic condition of the country, which is undergoing its recovery phase from the adverse impact of the pandemic and resulting global lockdowns.

He said the resumption of almost all economic activities since May has contributed significantly to the start of economic recovery. This is evident in the contraction in the country’s GDP growth that had gradually reduced from -28.6% in April to -19.5% in May and down to -3.2% in June.

“This shows that the start of the road to recovery should bode well for the expected full economic and financial recuperation for the country by next year,” Izuan said, adding that the move will augur well for the local banking sector in terms of avoiding further deterioration in net income margins and earning capacity.