KUALA LUMPUR, Jan 22 — Fitch Solutions Country Risk and Industry Research today said that Bank Negara Malaysia’s (BNM) positive outlook of the country's economy was inaccurate, and predicted that the central bank's overnight policy rate would be reduced by 25 basis points later this year.

The Fitch Solutions Group unit previously predicted the central bank to increase the OPR to 2.25 per cent this year but has now revised its projection to 1.50 per cent, saying that BNM would need to support the economy following the implementation of the latest movement control order (MCO).

On Wednesday, BNM chose to maintain the OPR at 1.75 per cent from July last year.

BNM had predicted that Malaysia’s economy would improve in the second quarter of this year, driven by a recovery in global demand, increased local economic activity, and the rolling out of Covid-19 vaccines.

"We believe that BNM’s assessment of the possible impact of the lockdown in Malaysia, extended to all states in the country except Sarawak on January 19, is too optimistic,” said Fitch Solutions.  

"We have consistently highlighted that since Prime Minister Tan Sri Muhyiddin Yassin first announced a partial lockdown for five states on January 11, it is likely that the lockdown will last longer than the initial two-week period, with the resulting economic fallout likely to be serious even if it does not match the record 17.1 per cent year-on-year (y-o-y) contraction seen in the second quarter of 2020 when the previous round of lockdown measures was in place.”

On Monday, Muhyiddin announced the Malaysian Economic and Rakyat Protection Assistance Package (Permai) worth RM15 billion, which Fitch Solutions said roughly makes up 1.1 per cent of Malaysia’s gross domestic product (GDP).

The research firm said that the government’s stimulus package was too small and will be largely ineffective at cushioning the impact of MCO. 

"We have also highlighted the lack of fiscal policy space to implement larger scale stimulus, even if as we predict, the government proceeds to raise the debt limit again in order to finance more stimulus,” it said.

Fitch Solutions said this leaves the central bank in a unique position to ease the economic fallout by cutting its policy interest rates to 1.50 per cent sometime this year and then maintain a lower policy rate thereafter.

"We also expect the central bank to continue playing the role of an assured buyer of government bonds in 2021 in order to keep yields anchored amid increased borrowing by the government to finance stimulus,” it added.

Fitch Solutions has also increased its average inflation forecast for the nation from 2.3 per cent y-o-y to 1.8 per cent y-o-y.

"The likely lower price pressures will give space for BNM to ease (the OPR) in 2021,” it said.

Yesterday the government extended the MCO to February 4.