Malaysia: Signs of recovery but caution is needed
In line with expectations from analysts, Bank Negara Malaysia (BNM) decision to maintain the Overnight Policy Rate (OPR) at 1.75%, in view of signs of economic recovery, indicates there will be no further easing in monetary policy.
But the drawbacks remain a possible rise in the #COVID-19 cases, that will slow the economic recovery and inflationary pressures.
“Following cumulative reduction of OPR by 125 basis points earlier this year, the current level of monetary policy is deemed to be “appropriate and accommodative” to stimulate growth.
Malaysia is recovering from sharp slowdown in 2Q20. The economy is expected to recover from 2H20 after the sharp contraction in 2Q20.
There are more signs of recovery in consumer and business activities based on the recent macroeconomic updates.
Vehicle sales have rebounded and registered positive growth (Jul-20: 13.2%yoy; Jun-20: 5.0%yoy), as buyers take the advantage the discounts and sales tax exemption from the fiscal stimulus package.
There is also an indication of improving labour market condition with the decline of unemployment rate to 4.9% (May-20: 5.3%) supported by increased employment (+102.3K; May-20: -45.5K).
INFLATIONARY PRESSURES
“We do not foresee any need for additional monetary easing for the rest of the year as the current level of monetary policy is deemed to be accommodative and in view of signs of recovering economic activities.
“At the current level, BNM has enough room to ease monetary policy if the situation arises in the future,” says MIDF.
Nevertheless, BNM also highlighted that the potential resurgence of Covid-19 cases remains a key downside risk to growth outlook.
Subdued inflationary pressures. BNM reiterated that inflationary pressures will remain subdued this year.
However, the changes in the global commodity prices remain as the key factor that can contribute to higher inflation going forward.
Inflation is expected to be in negative for 2020, mainly due to the low global oil prices.
The latest data showed that consumer prices continued to decline at slower pace (Jul-20: -1.3%; Jun-20: -1.9%) primarily due to the slower fall in prices of transport-related components (Jul-20: -10.3%; Jun-20: -14.3%).
BNM also expects for the underlying inflation to be muted in view of spare capacity in the economy. For 2020, we are expecting a deflation of -0.5%.
RECOVERING FROM HEAVY CONTRACTION
Malaysia’s economy is actually recovering from the biggest economic contraction registered by a country in the Asean.
Four weeks ago, Bank Negara says a slow recovery is expected after the economy contracted by 17.1% in the second quarter of 2020 (1Q 2020: 0.7%).
The decline reflected the unprecedented impact of the stringent containment measures to control the COVID-19 pandemic globally and domestically.
In Malaysia, the nationwide Movement Control Order (MCO) included various measures that restricted production and consumption activities.
This resulted in demand and supply shocks that emanated not only from significantly weak external demand conditions, but also production constraints in many economic sectors.
Additionally, there was a marked decline in tourism activity due to international border closures and restricted interstate travel.
On the supply side, most economic sectors registered negative growth, while most expenditure components declined. On a quarter-on-quarter seasonally-adjusted basis, the economy contracted by 16.5%.