BNM GUARDED ON LATEST ASSESSMENTS, HIGHER INFLATION IS TRANSITORY, SAYS ECONOMISTS

By Siti Radziah Hamzah

KUALA LUMPUR, May 6  -- The central bank was guarded with the latest assessments and while acknowledging the visibility of economic recovery, the growth outlook was still tilted to the downside, said Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid.

“Apart from that, higher inflation rate is expected to be transitory, suggesting that rising inflation rate is not driven by higher demand,” he told Bernama today.

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He said in that sense, Bank Negara Malaysia (BNM) is likely to maintain the overnight policy rate (OPR) at 1.75 per cent in 2021 in order to facilitate the recovery process," Mohd Afzanizam added. 

BNM has maintained the key interest rate at 1.75 per cent at its third Monetary Policy Committee meeting today, in line with market expectations amid the strengthening global economies.

The central bank said the latest indicators point to continued improvement in the local economic activity in the first quarter of the year and into April. 

BNM projected Malaysia’s headline inflation in 2021 to average higher between 2.5 per cent and 4.0 per cent primarily due to the cost-push factor of higher global oil prices.

Mohd Afzanizam pointed out that talks of an OPR hike are quite premature at the current juncture but risks of OPR cut was something that the market cannot totally rule out given the extent of  economic uncertainties arising from the pandemic. 

"So the incoming economic data for May and beyond will be the deciding factor in determining their next course of action," he said, adding that the sooner Malaysia achieved herd immunity, the better it will be for the economy.  

Asked whether the OPR would remain at 1.75 per cent in 2022, Mohd Afzanizam said tt would really depend on the pace of economic recovery and the associated risks to financial imbalances.

“If the economy continues to recover at a snail pace and there is no risk of financial imbalances such as speculative activities in the real estate markets or a sharp increase in household debt, then BNM could afford to wait and maintain the prevailing OPR of 1.75 per cent,” he added.

While the recent reimposition of containment measures in select locations will affect economic activity in the short term, BNM said the impact would be less severe as almost all economic sectors are allowed to operate.

On May 4, the government imposed a targeted movement control order (MCO), affecting six districts in Selangor from May 6-17 involving Petaling, Hulu Langat, Gombak, Klang, Kuala Langat and Sepang.

Kuala Lumpur and several districts and mukims in Terengganu, Johor and Perak are also placed under the MCO from May 7 to 20.

To this, Mohd Afzanizam said the lockdown would have an impact if the containment measures become widespread as Malaysia progressed this year. 

"Nonetheless, we could see a sharp increase in gross domestic product (GDP) in the second quarter of 2021 given that steep fall in GDP during the same period last year. So perhaps, in the immediate term, BNM would adopt a wait-and-see attitude," he added. 

Echoing Mohd Afzanizam, SPI Asset Management managing partner Stephen Innes said the recent lockdown would dampen Malaysia's economic growth, but the export market remained a good spot thanks to the improvising vaccinations in western markets.

"BNM left the OPR unchanged, preserving policy space while content to let the fiscal authorities do the bulk of the work. I expect BNM to keep policy on hold as most Asian central banks will be taking their policy cue from the US Federal Reserve, which is unlikely to raise interest rates until 2023," he told Bernama.

Innes added that by preserving policy space, the central bank would have much policy wiggle for a rainy day, if needed.

He added that commodity inflation should be transitory, and expected oil prices to bounce a little higher. 

"I also expect the Organisation of the Petroleum Exporting Countries would not want to overheat the market, and I think Brent will be capped at US$75 per barrel this year. 

"But even current prices offer a huge lifeline to improving Malaysia's depleted budget coffers, and anything above is simply gravy," said Innes. 

-- BERNAMA