KUALA LUMPUR (March 1): The Malaysian economy does not appear to be ready for monetary normalisation amid the absence of any signs of solid demand-side recovery, said MARC Ratings Bhd, which is expecting the central bank to hold the overnight policy rate unchanged at the historical low of 1.75% at the upcoming Monetary Policy Committee meeting on Thursday (March 3).

In a statement Tuesday (March 1), it said the country’s gross domestic product grew only 3.6% year-on-year in the fourth quarter of 2021 (4Q2021), after contracting 4.5% in 3Q2021, and that the rebound could have been higher if it wasn't dragged by sluggish demand, as well as low public and private sector investments.

And downside risks to growth remain significant, it said, amid heightened uncertainties associated with the Covid-19 pandemic response and geopolitical tensions ramping up.

“The government has lifted much of the supply restrictions in line with the National Recovery Plan but high-frequency data of late suggests that demand recovery is not automatic. 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/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," MARC said.

“The build-up of financial vulnerabilities from the extended period of historically low interest rate has been well contained thus far. The latest available data showed that the house price index (HPI) grew at the slowest pace in more than a decade in 3Q2021. Meanwhile, 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 BNM [Bank Negara Malaysia] to retain its accommodative monetary settings for some time,” said MARC.

As such, it envisages BNM to continue being cautious, while maintaining its assessment of the economy and inflation outlook, a status quo it has maintained since July 2020 to supoprt the economy's fragile recovery.

In January 2022, headline inflation fell to 2.3% from 3.2% a month earlier, while core inflation rose but remained below the 2% target at 1.6%.

MARC believes inflationary pressures will remain cost-push for now, mostly coming from food and non-alcoholic beverages, which constitute more than a quarter of the core inflation basket.

“We see further upside inflationary risks from higher commodity prices and a weaker ringgit due to the Russia-Ukraine war to only persist in the near term, and would be restricted by the continued slack in demand.

“As such, we expect the government to resort to short-term policy moves by suppressing rising prices via subsidies and other price control mechanisms,” said MARC.

It further said that 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 BNM's lift-off would only occur during 2H2022, and the quantum of rate increases would be gradual,” it added.