KUALA LUMPUR (Feb 11): RHB Investment Bank said a 25 basis points' (bps) cut in the overnight policy rate (OPR) by Bank Negara Malaysia at the upcoming Monetary Policy Meeting on March 4 is "baked in the cake", following an analyst briefing by the central bank today.
In a note, RHB Investment Bank senior economist Nazmi Idrus said there is an 80% chance of a 25bps cut, in view of a likely economic contraction for the third consecutive quarter in the first quarter of 2021 (1Q21), the output gap remaining wide, and tightening credit conditions in the construction, property and small and medium enterprise (SME) sectors.
"To address the aforementioned tight credit conditions in some sectors, we believe the central bank will also announce sector specific policies in 1Q21. These policies could include an extension of loan moratorium beyond June 2020.
"Further relief measures for SMEs could also be announced. We also maintain our view that the balance of risks is tilted towards another 25bps OPR cut in 2Q21," said Nazmi.
He said a third straight quarter of economic contraction is likely as the lockdown measures will continue to affect private consumption and investment.
Although the Movement Control Order was eased recently by allowing nearly all economic sectors to operate, compliance requirements remain tight, said the economist.
"In 4Q20, private consumption contracted by -3.4% year-on-year versus -2.1% in 3Q20 and is likely to remain weak in 1Q21. We see ongoing restrictions, especially limited mobility, to continue to suppress tourism-related activities including retail and accommodation.
"Data-wise, retail sales continued to fall in December at -2.0% year-on-year versus November's reading of -2.3% despite the ease of restrictions during the month. With measures being tighter in January and February this year, the contraction in retail is likely to be larger in these months and 1Q21 as a whole," he said.
Meanwhile, weak labour market conditions will also restrain consumer spending in 1Q21, with the research house expecting the unemployment rate to average around 4.8% year-on-year in the first half of 2021, versus 4.7% in the second half of 2020.
Nazmi noted the various support programmes by the government, particularly the cash handouts and the i-Sinar withdrawals, although he opined that this would not support consumer spending much.
The research house maintains its gross domestic product (GDP) growth forecast of 5.4% in 2021.
"Note that much of the improvement in year-on-year growth will come from the low base effect following sharp declines in 2020. In terms of levels of GDP, we are unlikely to see a return to pre-pandemic output levels in the near term," said Nazmi.