KUALA LUMPUR: The central bank is forecast to leave the overnight policy rate (OPR) unchanged at the historical low rate of 1.75% in the Monetary Policy Committee meeting tomorrow, according to MARC Ratings.
“We envisage Bank Negara will express its cautious stance while maintaining its assessment of the economy and inflation outlook. It has been in this status quo since July 2020 to support the economy’s fragile recovery,” the ratings agency said in a statement.
MARC Ratings said a higher interest rate would only be possible with a drastic change in the external environment or a speedier pace of pass-through amid rising input costs.
“Abrupt changes in the monetary policy are unlikely, and the monetary settings will remain sufficiently accommodative for some time. Otherwise, based on available data, we maintain our view that Bank Negara’s lift-off would only occur during the second half of 2022, and the quantum of rate increases would be gradual,” it said.
According to the ratings agency, the economy does not appear to be ready for monetary normalisation amid the absence of any signs of solid demand-side recovery.
“Real gross domestic product growth in the fourth quarter of 2021 came in at 3.6% year-on-year (Q3’21: 4.5% contraction), primarily driven by the easing of the supply side. The rebound could have been higher but was mired by sluggish demand as well as low public and private sector investments.
“Furthermore, the downside risks to growth remain significant amid heightened uncertainties associated with the pandemic response and geopolitical tensions ramping up,” it noted.
Also, as the number of Covid-19 cases has skyrocketed since February, consumers appear to exercise “voluntary lockdown” by refraining from making retail purchases and preferring to work or stay at home, as evident in recent Google Mobility data.
“Suffice to say that this will surely thwart demand recovery in the coming weeks or even months,” said MARC Ratings.
The build-up of financial vulnerabilities from the extended period of historically low interest rate has been well contained.
The latest available data showed that the house price index grew at the slowest pace in more than a decade in the third quarter of 2021.
Loan growth returned to pre-pandemic levels in 2021, but a sharp spike in the coming months is unlikely. Loan growth rose only marginally to 4.5% in December 2021 from 4.3% in the previous month.
“As such, it is compelling for Bank Negara to retain its accommodative monetary settings for some time,” said MARC Ratings.
Inflation is expected to remain modest. In January, the headline inflation fell to 2.3% from 3.2% in the previous month, while core inflation was pushed up but remained below the 2% target at 1.6%.