Another OPR hike is imminent, say economists

 

The door for a further hike in the Overnight Policy Rate (OPR) of another 25 basis points (bps) in the near term is still open in the second half of this year, subject to the stability of economic growth, the pace of inflationary rate and improvements in the macroeconomic conditions.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted that another 25 bps hike is quite likely as the central bank would need to be extremely careful in removing the monetary policy accommodation.

“Judging from the latest statement from the Monetary Policy Committee (MPC), it appears that Bank Negara is quite comfortable with the prevailing economic growth trajectory.

“Although the central bank continues to acknowledge the downside risks, the excessive monetary policy accommodation would need to be removed, which otherwise can cause other problems such as overheating the economy, excessive risk-taking due to low deposit rates, as well as high-level of indebtedness among households and businesses,” he told Bernama.

Bank Negara raised its OPR by 25 bps to 2.0 percent on May 11, in a move that surprised market consensus.

Malaysia’s policy rate has been anchored at 1.75 percent since July 2020, having reached that historically low level after the central bank slashed it by 125 bps since the onset of the Covid-19 pandemic at the start of that year.

More gradual interest rate hikes

OCBC Bank economist Wellian Wiranto said more interest rate hikes are expected to come in “a measured and gradual manner”.

OCBC Bank’s central scenario is for the next hike to come in September, allowing Bank Negara the space to gauge whether upside risk to inflation or downside risk to growth will be the greater foe before deciding to hike the rate further from there.

“The reality of higher inflation is something that Bank Negara has to countenance on the domestic front too, noting how 'the underlying inflation, as measured by core inflation, is expected to trend higher at between 2.0 percent and 3.0 percent in 2022' due to economic momentum and 'lingering cost pressures',” said Wellian.

He added that, given the unpredictability of growth trajectories globally, with the statement pointing out risks of “further escalation of geopolitical conflicts, worsening supply chain disruptions and adverse developments surrounding Covid-19” for instance, this is not a central bank that will act in haste.

Meanwhile, MIDF Amanah Investment Bank believes the focus of Bank Negara’s monetary policy setting is to ensure a sustainable recovery in the local economy.

“With the rate of inflation hovering within Bank Negara’s forecast, we opine that there is less pressure for the central bank to adopt aggressive policy tightening. At this point, we expect another 25 bps rate hike to 2.25 percent in the third quarter of 2022,” it added.

-Bernama