Monetary policy – on hold or further cut
The central bank has cut its overnight policy rate by a total of 125 basis points to 1.75% in the first four meetings of this year. The decision to leave policy on hold in the last meeting in September was a signal towards an end of the easing cycle as the economy gained some traction. This is probably why the consensus for the current meeting is skewed towards rates keeping on-hold. However, there still is a slim minority calling for a 25bp policy rate cut.
We haven’t pencilled in a rate cut for this meeting, though we don’t think it will be an unwarranted move at all. The pandemic continues to deter both domestic and external demand. On the domestic front, the high unemployment and lack of confidence have been hindering the economy. Exports, so far the key driver of recovery, will likely be under fire from renewed lockdowns elsewhere in the world. A 17% YoY GDP contraction in 2Q was the worst in Asia. So will be about 12% contraction that we anticipate for 3Q and 9.3% fall for the entire year.
We haven’t pencilled in a rate cut for this meeting, though we don’t think it will be an unwarranted move at all
While growth continues to take a hit from weak domestic demand, the persistently negative inflation trend offers the central bank sufficient room to cut rates further. Inflation dipped to -2.9% at the height of the first-wave in May, the second-worst in Asia after Thailand. It has recovered to -1.4% by September, though we don’t see it turning a corner into positive territory anytime soon. Moreover, this has left Malaysia’s real interest rates, defined as the policy rate minus the latest inflation rate, one of the highest in Asia – not a conducive backdrop for the recovery.
Among other arguments favouring further BNM rate cuts are limited leeway for fiscal policy easing, as discussed in the section below, as well as relatively resilient currency (Malaysian ringgit, or MYR) to the recent spike in political uncertainty, which should provide some comfort to the central bank in lowering rates.
