This article first appeared in The Edge Malaysia Weekly on November 2, 2020 - November 8, 2020

ON Tuesday, Bank Negara Malaysia will have a final opportunity to reduce the overnight policy rate (OPR) when it concludes its final Monetary Policy Committee (MPC) meeting for the year. Most economists are of the view, however, that the central bank is likely to stay put.

The last cut to the key rate was in July, when it was trimmed by 25 basis points (bps) to a record low of 1.75%.

Is another rate cut warranted now that Malaysia and its major trading partners are grappling with a new wave of Covid-19 infections that has brought about the partial lockdowns of economies?

Or is our economic data strong enough to weather any shortcomings shown up by the virus?

For one, Malaysia’s exports performance in September was promising, according to MIDF Research, as it returned to positive territory, registering a solid double-digit growth of 13.6% year on year in September — the highest expansion since October 2018.

Most economists believe the odds of a rate cut are highly unlikely at this point, simply because the current situation does not call for one right now.

Lee Heng Guie, executive director at The Associated Chinese Chambers of Commerce And Industry of Malaysia’s Socio-Economic Research Centre, is one such economist.

“We reckon that the third wave of Covid-19 infections in the country is likely to temper the economic recovery that we have seen so far, and we believe the central bank will also assess the [number and duration of the] infections, and how widespread the impact of the Conditional Movement Control Order (CMCO) is [to the economy].

“So far, we know that the CMCO is only being implemented in areas with a very high number of infections, so it is not like a total lockdown per se, which we saw earlier this year. Therefore, I would think Bank Negara will probably put on hold any OPR decision at its November meeting, as Budget 2021 is to be tabled on Friday.

“There is only so much you can do with the interest rate policy, as you still need a strong dose of fiscal policy, which is more effective during a downturn. The problem with a rate cut now is you may not see the [intended] effect of spurring new consumption or demand, because at the end of the day, it is about the level of confidence [among businesses and consumers],” he tells The Edge.

UOB Malaysia senior economist Julia Goh is more ambivalent as she believes the coming MPC decision will be a close call. However, she says to some extent, Bank Negara has taken into account the risk of a spike in Covid-19 infections in its GDP projections for the year.

“The lower bound of Bank Negara’s GDP projections of -3.5% to -5.5% for this year does assume such downside risks, including a setback in global growth, prolonged second/third wave of infections and a targeted MCO in high-risk areas,” she observes, adding that the central bank had previously pointed out that there are other policy levers that could be used to support economic recovery.

“This includes over RM18 billion [worth] of funds allocated for SME (small and medium enterprise) financing. We understand that Bank Negara has the capacity to increase this allocation for guaranteed funds and upsizing of funds when the need arises.

“Meanwhile, banks have intensified engagements with customers who require further assistance and offered ongoing support for households and SMEs that are facing difficulties,” she adds.

Vishnu Varathan, executive director and head of economics and strategy at Singapore-based Mizuho Bank, opines that Bank Negara does have a strong case to ease the rate further in the face of the Covid-19 resurgence, but believes the central bank is unlikely to resort to a rate cut as “the first port of call”.

“Moreover, external headwinds re-emerging from an outbreak of a second or third wave, which require the re-imposition of social restrictions, only heighten the urgency for more easing.

“However, in terms of ordering priorities and mitigating wider risks, Bank Negara will first and foremost resort to backstopping cash flow or liquidity risks, loan relief and access to credit. And to be clear, it is a second order priority to lower the policy rate.

“Instead Bank Negara, justifiably, will focus on taking care of the access to — rather than merely on the price of — money as a matter of utmost urgency. This is especially as fiscal policy, with the budget in view now, is more suited for tailored measures that the economy will need to sustain a better-footed recovery.”

He says the good news is inflation remains exceptionally low, allowing for greater room for rate cuts, which may be implemented in concert with more targeted and tailored credit and liquidity measures.

“Perhaps one reason not to resort to a suite of easing — constituting both rate cuts and broad-sweeping credit/liquidity measures — is to hold the rate steady through the uncertainty of the US elections — just in case a spasm of capital outflows is triggered at a time when political risks also cast a shadow,” he remarks.

Standard Chartered Global Research is one of the few research firms expecting a 25bps rate cut in the November meeting.

“The latest extension of the CMCO to Nov 9 may threaten the lower bound of the government’s 2020 GDP growth forecast of -3.5% to -5.5%. This may provide an anchor for Bank Negara’s decision [in November],” the firm says.

The firm adds that while external demand is expected to support economic activity, Malaysia has grown more domestically oriented in recent years.

“The trade-to-GDP ratio fell to 120% in 2019 from 131% in 2015, while household consumption accounted for about 80% of GDP growth from 2015-2019. Further rate cuts may not boost investment activity at this time. But lower interest rates may help to lower financing costs and provide a bit more of a cash buffer for households. For example, mortgages are worth about 41% of GDP and a 25bps cut may save indebted households about 0.1% of GDP in financing costs per annum,” says Standard Chartered.

CGS-CIMB Research is also pencilling in a 25bps cut in the OPR to 1.5%, in order to support the economic recovery.

“Political uncertainty and social distancing curbs could cool consumer and business sentiment, with downside risks in the near term to the recovery in imports of consumption goods and capital goods.

“We maintain forecasts for 2020 gross exports at -2.0% and gross imports at -3.5%, which collectively underpin a current account surplus of 2.8% of GDP, providing a degree of stability to the ringgit from dislocations in financial flows,” the firm says.

Exports, so far the key source of recovery, will be under fire from renewed lockdowns in Malaysia’s main trading partners, according to ING Asia economist Prakash Sakpal.

“Moreover, the export recovery also is lopsided, coming mainly from the electronics sector while commodity exports like crude petroleum continue to reel under weak global demand and prices.

“As such, more central bank rate cuts won’t hurt, while there is scope for the same provided by an ongoing negative inflation trend that’s likely to be stretched further ahead and leave real interest rates one of the highest in Asia. The ringgit also has been resilient to the latest political noise and this should provide some comfort to Bank Negara in cutting rates.

“Indeed, broad-based policy support via both monetary and fiscal sides will go a long way in shoring up demand. However, not much could be expected on the fiscal side given the massive stimulus already unleashed earlier this year and prevailing constraint of public debt. Hence, the monetary policy will have to do all the heavy-lifting. I think Bank Negara should ease to the extent possible in the unprecedented crisis, [and] whether it does [this] week still needs to be seen,” he adds.

Bank Negara’s decision on Tuesday comes a few hours ahead of the US election results and three days before Budget 2021 is tabled in parliament. As at last Friday, there were 10,392 active Covid-19 cases reported in the country. It remains to be seen whether this is reason enough to trigger a pre-emptive rate cut.

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