Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the central bank would likely reduce the OPR by 25 basis points during the meeting.
“We have seen that the number of new infections has yet to subside, leading to the reintroduction of the movement control order (MCO) in key states for two weeks. This would result in output loss as human mobility is highly restrictive.
“What it means is that the present gross domestic product (GDP) forecast of 6.5% to 7.5% for 2021 looks pretty much unattainable,” he said.
Therefore, the situation warrants more policy support, said Afzanizam, adding that context, a reduction in the OPR and perhaps the statutory reserve requirement too could help to rejuvenate the growth trajectory expected in 2021.
The OPR currently stands at 1.75%. BNM had reduced a cumulative 125 basis points in the OPR between January and July last year.
According to the health ministry, Malaysia recorded 3,339 new Covid-19 infections yesterday, down from the previous day’s 4,029 cases, bringing total confirmed infections in the country to 158,434.
Seven more deaths were recorded on Sunday pushing the death toll past 600 to 601 or 0.83% of total infections.
On the possible impact of further OPR cut on banks, Afzanizam noted that in the past, net interest margin compression was unavoidable given the adjustment between the financing rates and deposit rates.
“The financing rates will be adjusted almost immediately for the variable financing contract while the fixed deposits would take some time to be adjusted lower. For example, the deposit rates will only be reset lower once the deposit has matured,” he added.
Meanwhile, Axi chief global market strategist Stephen Innes believed that BNM may hold back cutting rates now but would signal a rate cut later this year to better coordinate with the economic reopening with the availability of vaccines.
“There seems to be a building consensus for a rate cut due to the reimposition of the MCO as it will harm the economy. I think policy inputs, like interest rate cuts, are less effective during a lockdown.
“However, either way, I’m splitting hairs as a rate cut at any time will provide economic relief,” he told Bernama.
Innes said BNM had noted the Covid-19 resurgence as a risk and remained committed to utilising its policy levers to support a sustainable economic recovery.
He added that with recent mobility restrictions on 85% of the economy with the reimplementation of MCO and conditional MCO, the toll on first quarter GDP would be significant, and an interest rate cut remained a possibility.
“I was factoring in a rate cut later this year but if BNM makes a pre-emptive strike, I think it would be the one and not signal an easing policy, so the currency market will not react negatively,” he said.
OCBC Bank, meanwhile, said it is expecting BNM to turn more downbeat on the OPR, noting a heightened chance of a rate cut of down to 1.5% from the current 1.75%.
In its 2021 Economic Outlook, OCBC chief economist Selena Ling said depending on how things pan out in the Covid-19 fight in the weeks thereafter, there might well be another rate cut of down to 1.25% in the next Monetary Policy Committee (MPC) meeting in March.
“With the relatively dim prospect of large scale fiscal help, the onus is thus for monetary policy to shoulder the burden more considerably.
“When BNM left its OPR unchanged at 1.75% for the second time running in its last MPC meeting on Nov 3, it still sounded quite sanguine on growth prospects. We expect that tone to have turned more downbeat by now in the face of recent events,” she said.
On the whole, Ling said the bank remains constructive of Malaysia’s economic prospects and the eventual recovery in the later part of 2021.
“This is especially since its manufacturing sector is well-geared to partake in the global electronics recovery, for example, but the immediate months ahead will present some speed bumps,” she said.