Rate hike signals Malaysia's sanguine economic prospects

 

Another 25 basis points (bps) hike in the overnight policy rate (OPR) announced by the Bank Negara Malaysia (BNM) today has signalled Malaysia’s sanguine economic prospects, driven by strengthening domestic demand and strong export growth, says MIDF Research.

It said BNM foresees growth momentum on a firmer footing, thanks to the transition to endemicity and the reopening of international borders, which have resulted in stronger economic activity, a lower unemployment rate and more people entering the job market rate and a better income outlook.

“We believe the latest assessment indicates continued confidence that Malaysia’s macroeconomic condition will continue to improve,” it said in a note today.

In its fourth Monetary Policy Committee (MPC) meeting on July 5 and 6, the central opted to increase the OPR from 2.00 percent to 2.25 percent, matching the research firm and the market’s expectations.

This followed a 25bps hike to 2.00 percent at the May 10 and 11 meetings.

MIDF expects further policy normalisation would likely be carried out in the September 2022 MPC meeting with another 25 bps hike.

“We believe the current focus of BNM’s monetary policy is to ensure sustainable recovery of Malaysia’s economy. With the rising trend in core inflation and stronger-than-expected domestic demand, we believe BNM will raise the OPR by 50bps in the second half of the calendar year 2022,” it said.

However, it said that the decision would be subject to the stability of economic growth, the pace of price increases and a further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.

From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness.

Gradual monetary policy adjustments

Echoing MIDF, Bank Islam Malaysia Bhd noted that the MPC members are of the view that the degree of monetary accommodation would need to be adjusted in light of the positive growth prospects of the economy.

Thus far, the BNM has indicated that adjustments in its monetary policy, as manifested by the OPR, will be done on a gradual basis, the bank said.

“In that sense, we believe a 50 bps hike in the OPR at one go is off the table. Having said that, we believe BNM may want to increase the OPR by another 25 basis points in September as the focus now is on addressing high inflationary pressures as demand condition has improved amid the high-cost environment,” chief economist Mohd Afzanizam Abdul Rashid told Bernama.

OCBC Bank highlighted that while the latest headline inflation of 2.8 percent year-on-year (y-o-y) in May was indeed higher than the 2.7 percent that was expected, the pace of increase has been less concerning than in other countries.

“To be sure, there are obvious areas that deserve a close watch. These include food prices that have accelerated to 5.2 percent y-o-y, driven by items such as chicken prices, which climbed 13.4 percent y-o-y.

“The fact that core inflation has gone up from 2.1 percent to 2.4 percent is a reminder of the potential for a broadening of price pressure beyond food and fuel categories as well,” OCBC economist Wellian Wiranto said in a note.

Indeed, as BNM noted in its MPC statement today, the underlying inflation “is expected to average between 2.0 percent and 3.0 percent in 2022 as demand continues to improve amid the high-cost environment”.

However, even as price pressures need to be contained, it does not warrant an outsized move by BNM just yet, because, unlike some regional peers, it hiked the OPR earlier this year.

Maybank Investment Bank chief economist Suhaimi Ilias said the investment bank is maintaining its view of a total of 75 bps this year to 2.50 percent, and another 50 bps hike next year to 3.00 percent.

The investment bank recently estimated a 100 bps increase in the OPR for the period between the second half of 2022 and the first half of next year.

- Bernama