Home Economy Business Fitch Solutions revises OPR forecast to 1% for 2020

Fitch Solutions revises OPR forecast to 1% for 2020

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PETALING JAYA: Fitch Solutions has revised its policy rate forecast for 2020 to 1.75%, from 1.00% previously, to reflect a less dovish Bank Negara Malaysia (BNM), which appears to be prioritising the preservation of policy space in anticipation of a further negative shock over the coming months, over accelerating the slow recovery of the economy.

“Our revision reflects our view for BNM to keep interest rates on hold over the remainder of 2020. Accordingly, we have also revised our 2021 policy rate forecast from 2.00% to 2.25%, anticipating 50bps worth of hikes next year,“ Fitch said in a report.

It said inflation is likely to return to near-trend levels in 2021 as both economic activity and demand picks up, boosted by low base effects in 2020, allowing the central bank to hike with less concerns about disinflation. The strong recovery it expects in 2021 would further pave the way for BNM to rebuild policy buffers.

BNM held the benchmark overnight policy rate at 1.75% after yesterday’s Monetary Policy Committee meeting.

“In our view, the central bank has rolled back its dovish stance significantly, placing stock in the revival of economic activity after prior monetary easing and a continued easing of movement restrictions in Malaysia. Indeed, in the statement accompanying the decision, BNM said that ‘the cumulative 125 basis points reduction in the OPR this year will continue to provide stimulus to the economy’ which seems to indicate that it believes it has already done enough for 2020.”

Fitch has also revised its average inflation forecast for 2020 down to -0.5% from -0.2% previously. There has been an extended run of deflation, with price growth averaging -1.8% y-o-y between March and July, with the 2020 year-to-date average at -0.9%. This deflationary run is likely to persist for a few more months before inflation turns slightly positive towards the end of the year, as economic activity, while recovering is likely to remain sluggish.

“Indeed, we recently revised our 2020 real GDP growth forecast down to -4.5% from -2.8% previously, following the dismal -17.1% y-o-y print in Q2’20. Inflation is likely to pick up further in 2021, and we forecast average price growth of 2.3% y-o-y as demand picks up along with the economic recovery, helped along by low base effects in 2020.”

“Indeed, we forecast growth of 6.3% in 2021, again with returning economic activity and a boost from low base effects in 2020. This strong growth environment would allow BNM to hike rates with less concerns about harming the recovery, as we expect to be the case over the remainder of 2020.”

It added that a further negative shock remains the largest downside risk to its forecasts, for instance, a second wave of Covid-19 outbreak in Malaysia or in one of the major economies such as China, could jeopardise the recovery and force BNM to take more drastic measures to support the economy.