KUALA LUMPUR: Bank Negara Malaysia is expected to announce a 25 basis points cut to the Overnight Policy Rate (OPR), taking it to 1.50 per cent in the next Monetary Policy Committee Meeting on Match 4.
HSBC Global Research Asean chief economist Joseph Incalcaterra said the government may continue to reallocate expenditure towards short-term measures, but a large package of fresh spending is unlikely.
More assistance will be needed in the short term to offset the impact of the latest lockdown and this suggests the burden will fall on monetary policy.
"We have continued to stress that Bank Negara has substantial policy space that should be used to confront clear hit to economic activity and fresh disinflationary pressures," he said in a note today.
The 5.6 per cent contraction in Malaysia's gross domestic product (GDP) in 2020 should not be too much of a surprise as the latest wave of Covid-19 infections has proven to be incredibly tenacious, impacting consumer mobility and spending at the end of the year, Incalcaterra said.
He said unfortunately, conditions are likely to deteriorate further in the first quarter (Q1) of 2021 given the imposition of a fresh one-month lockdown, the Movement Control Order (MCO), putting the government and Bank Negara's 2021 6.5-7.5 per cent forecast range at risk.
"Even though the lockdown has since been relaxed, consumer mobility is unlikely to improve as new cases continue to rise at an elevated pace in February," he said.
Incalcaterra said however it is not all bad news.
"For one, the recent restrictions are slightly less onerous compared to the lockdown in early 2020, and crucially, should have a minimal impact on the manufacturing sector.
"The outlook for Malaysia's industrial production and exports continue to strengthen, and we think that exports in Malaysia will outperform due to robust global semiconductor and broader electronics demand.
"Despite weaker net FDI (foreign direct investment) inflows in 2020, manufacturing FDI approvals increased over the course of 2020 - most of which are in the semiconductor space, which suggests further capacity additions.
"At the same time, higher LNG (liquefied natural gas) and palm oil prices are clearly a welcome development for Malaysia," he said.
He said despite the immense disruptions of the pandemic, a relatively robust policy response in Malaysia has helped to prevent structural damage seen elsewhere.
He said well-targeted fiscal policy support allowed for a relatively resilient labour market, with somewhat limited retrenchments, while loan moratoria and subsidised facilities helped protect the financial position of small and medium enterprises and consumers.