BNM likely to maintain benchmark interest rate at record low

 

Bank Negara Malaysia is expected to keep the overnight policy rate at 1.75% in its announcement today.

KUALA LUMPUR: Bank Negara Malaysia (BNM) is widely expected to maintain its benchmark interest rate at a record low on Wednesday, continuing support for the nascent economic recovery before it shifts gears in the second half of the year.

BNM will keep the overnight policy rate steady at 1.75%, according to 14 of 19 economists in a Bloomberg survey. The remaining five analysts expect a 25 basis point hike. BNM last adjusted borrowing costs in July 2020.

The central bank has indicated it is in no rush to raise rates as it navigates global volatility, inflation and a weakening ringgit. The slowdown in China – Malaysia’s largest trading partner – and the ongoing war in Ukraine are risks to the outlook of the nation’s economy, which is currently seeing a pick-up in activity on fewer virus curbs.

The bank “continues to reiterate its cautious stance, contrary to the hawkish Fed, and we believe BNM’s focus will continue to be on GDP growth,” Nazmi Idrus and Lim Yee Ping, analysts at CGS-CIMB, wrote in a report. They expect policy normalisation to begin only in the second half of the year, with two separate 25-basis point increases.

It is the first time since 2018 that some economists surveyed by Bloomberg are expecting BNM to raise rates. One of them – United Overseas Bank’s Lee Sue Ann – expects borrowing costs to rise by 25 basis points to 2%, citing prevailing upside risks to Malaysia’s inflation outlook as activity improves.

Here’s what else to watch for in Wednesday’s statement:

Growth outlook

BNM will assess the strength of the country’s growth recovery in 2022 and may reiterate that risks to the growth outlook remain tilted to the downside.

The economy may have quickened 1.1% in the March quarter from the previous three months, according to Moody’s Analytics.

The central bank will release first quarter gross domestic product data on Friday. BNM expects GDP to expand between 5.3% and 6.3% this year, lower than its earlier projection of 5.5%-6.5%.

Policy guidance

BNM may provide guidance on the path of monetary policy as it seeks evidence to support an increase in borrowing costs, said RHB Bank Bhd economist Sailesh K Jha in a research note.

The central bank will want to observe key data such as first quarter GDP and April core CPI, for further signs that slack in the economy is waning, real wages are firming up and risks from the Ukraine conflict on the country are negligible, he added.

Inflation risk

Malaysia’s latest headline inflation data remained unchanged at a six-month low of 2.2% year-on-year in March, reflecting the central bank’s expectations that price pressures will remain moderate in 2022.

Core inflation, however, edged higher, pointing to underlying price pressures from growing domestic demand as labour market conditions improve and the economy reopens, according to MIDF Research.

Upside risks exist going forward from elevated commodity prices, a hike in minimum wages, and the government’s review of blanket fuel subsidies, analysts at Maybank wrote in a research note. - FMT