PETALING JAYA: The end may be in sight for Bank Negara Malaysia’s (BNM) overnight policy rate (OPR) hike cycle, UOB Global Economics & Markets Research said after BNM’s Monetary Policy Committee lifted the OPR by 25 basis points (bps) to 3.00% in a surprise move on Wednesday.
“With today’s hike, the OPR is back to pre-pandemic levels. Given that OPR is now at our estimated terminal rate, we think BNM will likely leave rates unchanged at 3.00% for the rest of the year given rising recession risks in advanced economies following the flare-up of global banking sector crisis in March and US debt limit issue amid tighter financial conditions,” it said in a note.
However, it added that based on the forward guidance articulated in the latest monetary policy statement, BNM has not completely closed the door on further rate increases.
This is interpreted from the two sentences added in the monetary policy statement versus March’s statement – “In light of the continued strength of the Malaysian economy, the MPC also recognises the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances” and “At the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy.”
“The above two lines replaced the sentence of ‘further normalisation to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications to the domestic inflation and growth outlook’ which was spelled out in the January and March statements,” UOB said.
A Bloomberg poll showed that 16 out of 19 analysts expected a rate pause, with BNM maintaining it at 2.75%, while only three expected an increase.
The Malaysian central bank said with the domestic growth prospects remaining resilient, the MPC judges that it is timely to further normalise the degree of monetary accommodation.
“With this decision, the MPC has withdrawn the monetary stimulus intended to address the Covid-19 crisis in promoting economic recovery. In light of the continued strength of the Malaysian economy, the MPC also recognises the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances.
“At the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy. The MPC will continue to ensure that the monetary policy stance remains consistent with the outlook of domestic inflation and growth,” it said in a statement.
BNM said it sees further expansion in the Malaysian economy in first-quarter 2023, driven by resilient household spending as unemployment eases to pre-pandemic levels and a pick-up in tourist arrivals is expected to lift tourism activity. Investment growth will be supported by implementation of projects including those from the retabled Budget 2023.
Despite global monetary tightening and financial sector risks in advanced economies, domestic financial conditions remain stable with no signs of excessive tightening affecting consumption and investment activities.
BNM views the risks to domestic growth to be relatively balanced, as domestic growth drivers help to anchor the economy against rising external uncertainties and a slower global outlook.
Both headline and core inflation have moderated and are expected to continue moderating for the rest of the year. BNM projects headline inflation at 2.8%-3.8% this year. Nevertheless, core inflation remains elevated (above headline levels) amid firm demand.
The central bank sees inflation risks tilted on the upside and largely dependent on domestic policy changes including on subsidies and price controls, financial market developments and commodity prices.