This article first appeared in The Edge Malaysia Weekly on September 14, 2020 - September 20, 2020

BANK Negara Malaysia’s use of the words “appropriate and accommodative” in describing its current monetary policy stance last Thursday has more economists convinced that it is done trimming its key overnight policy rate (OPR) and will keep the two-month-old, record-low figure of 1.75%, at least until year-end — unless economic and labour market conditions suddenly take a turn for the worse.

The decision of the monetary policy committee (MPC) to maintain the rate in its Sept 10 meeting — after successive cuts totalling 125 basis points in four of its earlier meetings from January to July this year — was expected by a slim majority of 12 versus nine others who had expected another 25-basis-point cut in a Bloomberg poll. An earlier poll in mid-August, about a week after a lower-than-expected second-quarter GDP reading of -17.1%, had just over half of those surveyed expecting another cut.

In deciding to pause, the MPC acknowledged a downside risk on its outlook owing to uncertainties surrounding the pandemic but noted that economic activity in Malaysia continued to recover from the trough in April and “latest high-frequency indicators show that labour market conditions, household spending and trade activity have continued to improve”. On Sept 11, official data showed unemployment declined further to 4.7% in July from 4.9% in June, 5.3% in May and 5% in April this year.

“The cumulative 125-basis-point reduction in the OPR this year will continue to provide stimulus to the economy,” the central bank said in its Sept 10 statement, adding that it “remains committed to utilise its monetary policy levers as appropriate to create enabling conditions for a sustainable economic recovery”.

While the OPR remains the key monetary policy tool and “the dovish pause is to preserve monetary policy space” in the event that the downside risk to current baseline expectations of a shallower economic recession in the second half of 2020 materialises and the economic rebound in 2021 fails to happen, the central bank has other measures that it can employ, says Maybank Investment Bank Bhd regional head of economic research Suhaimi Ilias.

These measures which he says are used and currently being used include the central bank injecting additional liquidity into the system by purchasing more Malaysian Government Securities (MGS) in the secondary market.

“On this basis, Bank Negara can hold up to 10% of outstanding MGS totalling RM431.7 billion currently versus [its] current holdings of 2.5% of outstanding MGS,” says Suhaimi, who was among the minority of economists who had expected last week’s pause as early as July.

According to official data, Bank Negara’s holdings of Malaysian government papers stood at RM10.47 billion as at end-July, up RM8.7 billion from RM1.74 billion as at end-February this year. This means that the central bank could still purchase at least another RM30 billion of MGS, should it choose to, our back-of-the-envelope calculations show. The central bank’s holding of government paper was RM1.98 billion or 0.5% of the total of RM394.1 billion as at end-2019.

If it chooses to expand its bond purchase programme, Bank Negara — which still has policy space — would certainly not be the first among its peers in this region to do so. In a bulletin in June this year, The Bank for International Settlements, which serves central banks, noted the importance of initial conditions and “how well measures were designed and communicated” after its analysis found the actual market impact of bond purchases by central banks “varies widely between countries” that have employed them.

Bank Indonesia governor Perry Warjiyo, for instance, told reporters in August that quantitative measures such as monetary easing through the banking system “are more effective to support economic recovery” and noted the need to “maintain an attractive spread for foreign investors” as among considerations for keeping its benchmark rate unchanged. Bank Indonesia, which cut its benchmark rate by 100 basis points last year and another 100 basis points this year to a record low of 4%, had reportedly injected more than IDR651 trillion (RM181 billion) of liquidity into the system this year. In July, Indonesia said the central bank would directly buy some US$28 billion (IDR397.6 trillion) of bonds without receiving interest to help fund economic recovery and Indonesia’s fiscal deficit of 6.34% of GDP. Bank Indonesia would also be a standby buyer and help pay some interest expenses for IDR177 trillion worth of bonds that the Indonesian government would sell to fund recovery schemes.

It remains to be seen whether the Malaysian government would be tapping the central bank the same way but economists reckon that Bank Negara has other means of helping recovery, apart from cutting the OPR or the statutory reserve ratio (SRR) that applies to the banking system.

While the SRR was as low as 1% in March 2009 compared with 2% currently, Suhaimi notes that the flexibility of allowing banks to use MGS and Malaysian Government Investment Issue (GII) to comply with the 2% requirement instead of setting aside standard eligible liabilities means that there is only “just over RM2 billion left” after RM43 billion was released into the system from March this year.

That said, Suhaimi says the central bank can still employ administrative measures as well as other regulatory and supervisory reliefs to counter the economic impact of Covid-19, including extending the loan moratorium on a targeted basis as well as allowing banks to operate below the minimum liquidity coverage ratio requirement of 100% and lower net stable funding ratio of 80%.

The central bank can also expand and extend targeted funding schemes, he adds, noting that about RM10.3 billion had been utilised from the RM13 billion allocated by Bank Negara for soft loans to small and medium enterprises (SMEs) under the Prihatin Rakyat Economic Stimulus Package to ensure access to cheap funding amid the pandemic.

Peck Boon Soon, head of Asean economics research at RHB Research Institute — who also rightly predicted a pause by the central bank earlier than most peers — is also for the targeted extension of loan moratorium post the expiry of the blanket moratorium at end-September and other measures to help reduce pressure on businesses and minimise job losses.

“[That], in turn, could help sustain private consumption in the country. This, together with a recovery in exports, is likely to help the country’s economic recovery. In this regard, I believe Bank Negara has done what it can. What we need now is more efficient fiscal spending to ensure that it flows through the economy with greater impact,” says Peck.

Peck continues to be in the “no rate cut group” and reckons that the change in consensus means that more people now agree that “economic activity has been improving and there is no urgency for Bank Negara to cut rates further”.

This is despite there being room for further cuts, with headline inflation expected to range from -1.5% to 0.5% this year, before averaging higher at between 1% and 3% in 2021.

“Interest rates in Malaysia have been very low and there is probably a need for Bank Negara to balance it so as not to push it too low to discourage savings and encourage higher risk-taking activity,” Peck adds.

This is good news for pensioners counting on interest from fixed deposits, with pension fund earnings likely to be impacted by (expected and actual) lower dividend payouts from even the most stellar of dividend-paying stocks, as corporates choose to conserve cash amid tougher operating conditions owing to the ongoing pandemic.

While sustaining economic growth is arguably more important, there is no denying that the low interest rate environment is already punishing savers.

While a retiree with RM480,000 saved up, for instance, can still have RM2,000 a month to spend for 20 years (on declining balance), a fixed deposit rate of 5% per annum would have given him or her a monthly interest of RM2,000 without any of the RM480,000 being drawn down. To have RM2,000 yield a month to spend — in line with the new RM2,208 poverty line income — one would need to have RM2.4 million saved up at 1% interest per annum or RM1.2 million saved up at 2% interest per annum compared with RM800,000 savings at 3% interest per annum or RM600,000 savings at 4% interest per annum.

In South Korea, where the policy rate is at 0.5%, how rate cuts appear to be directly linked to housing price disruptions has become a heatedly debated topic.

The last scheduled MPC meeting for the year is on Nov 3, just over a week ahead of the release of the third quarter GDP reading on Nov 13. Budget 2021 is slated to be tabled in parliament on Nov 6.

To be at the better end of the central bank’s -3.5% to -5.5% GDP forecast for 2020 (revised from -2% to 0.5% following the 2Q GDP release in August), the country’s economy needs to grow at least 1% in the third and fourth quarters. Even if the economy continues to contract in the third quarter, the central bank’s GDP forecast will still be met if the contraction is below 7% in the third quarter, followed by a 1% growth in the fourth quarter. This is given that the GDP grew 0.7% in 1Q2020 and contracted 17.1% in 2Q2020. Bank Negara had projected GDP growth at 5.5% to 8% for 2021.

In the meantime, economists are keeping a close watch over whether the green shoots of economic recovery will continue to grow when targeted measures are implemented upon the expiry of the blanket loan moratorium and wage subsidy programmes at the end of September.

Julia Goh, senior economist at UOB Bank Malaysia, who expects the road to recovery to be “mixed and bumpy”, is watching out for details of the medium- to long-term economic recovery plan next month and the tabling of Budget 2021, which is aimed at revitalising the economy.

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