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Malaysia Monetary Policy January 2021

Malaysia: Bank Negara Malaysia decides to remain on hold for third time in a row in January

At its first meeting of the year on 20 January, the Monetary Policy Committee of Bank Negara Malaysia (BNM) decided to leave the overnight policy rate unchanged at its record low of 1.75%—the third consecutive hold. The decision caught market analysts by surprise, with the majority expecting an additional cut amid the recent spike in new Covid-19 infections and the renewed restrictions introduced on 13 January.

The Bank’s decision to stand pat was underpinned by its assessment that the newly introduced restrictions would not majorly disrupt the recovery, as well as expectations of returning inflationary pressures. Rising new Covid-19 cases throughout Q4, coupled with the reimposition of some restrictions in the same quarter, hampered activity in the final stretch of last year. As such, the Bank expects the GDP contraction for 2020 to come in closer to the lower end of its forecast range of minus 3.5% to minus 5.5%. Nonetheless, activity is expected to pick up from Q2, on the back of strengthening foreign and domestic demand, and improved sentiment amid the vaccination rollout. On the inflation front, consumer prices are expected to have fallen for the first time in the series’ history in 2020. However, inflationary pressures are seen returning in 2021, and will remain closely linked to commodity and oil price movements.

Looking ahead, the Bank struck a relatively neutral tone in its communiqué. The Bank emphasized that downside risks, particularly those associated with the uncertain trajectory of the pandemic and the vaccine rollout at home and abroad, cloud the outlook. It committed to “utilize its policy levers as appropriate to create enabling conditions for a sustainable economic recovery”.

Commenting on the monetary policy outlook, analysts at Nomura said:

“We continue to see the case for monetary easing as clear and hence still expect a 25bp cut in the OPR, likely delivered at BNM’s next meeting on 4 March. As argued before, we think the impact of the resurging Covid-19 case numbers and the lockdown measures is significant when there are already signs that the recovery is weakening and the unemployment rate is rising even before the lockdowns.”

The next monetary policy meeting is scheduled for 4 March 2021.

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