While the risk of a cut had obviously gone up, not down, recently due to the uptick in pandemic challenges and political bickering, it was not enough to tip the scale. Bank Negara kept its OPR unchanged at 1.75%, for the second time running, in line with what we and the broad market expected.
BNM appears to sound relatively sanguine on growth outlook still, pointing out significant improvement in economic activity. Still, it continued to warn about downside risks to growth – not least due to the pandemic outbreaks.
While noting that the current policy stance remains appropriate, BNM stressed that it is nonetheless committed to utilise its policy levers as appropriate. In short, BNM has left the door open for a rate cut. Much would depend on how the economic recovery shapes out in Q4 and beyond, as impact of global lockdowns – and upcoming US election – come through.
Times are tough for Malaysia. Not only does it have to fight through another bout of pandemic outbreak in key economic centres such as the Klang Valley region, but the country has also had to witness another round of twists and turns in its political drama of late. All these, at a time when the economy is still trying to pick up the pieces from the damage wrought by the first round of outbreak in pandemic and political uncertainties from earlier in the year.
Hence, going into MPC meeting, the risk of Bank Negara reaching for a rate cut has obviously gone up, not down. And, if we were to be honest, even though our call was indeed for a hold, it was a rather finely balanced view.
As it turns out, BNM appears to be looking at the situation from the half-glass-full angle at this stage. Things might not be great, to be sure, but are they good enough for now? The answer seems to be yes.
On the global growth front, its statement highlights how the “global economy continues to recover, led by improvements in manufacturing and export activity.” It added that the latest signs are still signaling that economic activities have picked up in most advanced and regional economies, “with a more pronounced recovery momentum in PR China.”
A similar story is told when it comes to Malaysia’s domestic economic momentum. The MPC statement notes how “the latest indicators point towards significant improvement in economic activity in the third quarter.”
Long story short, as heavy as the onslaughts of negative headlines have felt, there has been enough uptick in economic momentum, both abroad and onshore, for the MPC to not hit the panic button, so to speak.
Still, set against the unknowns of the world at this stage, the BNM is still keen on noting how things might just turn south suddenly.
On the broader front, the statement noted how the “global economic recovery will likely remain uneven in the near-term”, due to the re-introduction of Covid-containment measures, even if they are “generally less restrictive than earlier measures.”
At home, it acknowledged how the outbreak in several states “could affect the momentum of the recovery in the fourth quarter.”
Tellingly, however, BNM noted that, despite the challenges, growth for the year 2020 is “expected to be within the earlier forecasted range” of between -3.5 to -5.5%. For good measure, it is telegraphing how “For 2021, economic activity is expected to improve further,” due to “recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new facilities.”
The middle part about “continued support from policy measures” can perhaps be read as, at least partially, an expectation for a still fairly expansionary fiscal policy. (The Finance Minister is slated to present Budget 2021 and we expect deficit to come down only slightly to -5.5% of GDP, compared to around 6.0% for this year).
Overall, it looks to us to be a central bank that is seeking to strike a balance on multiple fronts. Even as it acknowledges the downside risks, it wants to note that the outlook remains brighter than what the headlines might suggest.
Similarly, in terms of policy actions, it portrays the current policy stance as being still “appropriate and accommodative”, reminding us how it has enacted a cumulative 125 basis points of OPR reduction this year, for instance.
And yet, it has left the door open to act if necessary. Lifting verbatim in length from the statement: “The MPC will continue to assess evolving conditions and their implications to the overall outlook for inflation and domestic growth. The Bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.”
Putting all the different pieces of the puzzle together, the picture looks to us to be one of a central bank that would not hesitate to act by cutting its policy rate, if it deems that the downside risks it mentioned start to weigh on growth momentum more visibly.
In particular, if Q4 outturn gets impacted even more, either because of a slump in exports or an enforced shutdown of business activities, then BNM would be coming in fast. Even though the next MPC meeting will not take place until 19-20 January 2021 (as per the just-released schedule), if push comes to shove, there might even be an inter-meeting decision to cut as well – if necessary.
That is still not our baseline, but the next few weeks – in terms of both domestic virus fight and global economic and financial market developments post US-election would be the key determinant.
By Wellian Wiranto, OCBC Bank Economist