BNM walking an inflationary tightrope with OPR pause

 

The OPR pause marks the end of BNM’s hiking cycle because the growth outlook is deteriorating, says Euben Paracuelles of Nomura Holdings Inc.

PETALING JAYA: Bank Negara Malaysia’s (BNM) announcement that it is pausing its interest rate tightening cycle has taken economists and analysts by surprise.

In a recent Bloomberg poll of 18 economists, 17 expected BNM to increase the overnight policy rate (OPR) to 3% from 2.75%. Only one predicted the central bank would decide to hold.

BNM is possibly one of the first central banks in the region to pause its tightening cycle, and its move yesterday has largely been welcomed by all and sundry, from homeowners to businessmen with credit lines to service.

Malaysia was the first to raise its benchmark interest rate in Southeast Asia’s tightening cycle starting May 2022.

The pause in the OPR tightening has given breathing space not only to Malaysians and businesses, it has also given BNM the space and time to figure out its next move.

BNM said the decision to pause OPR hikes would allow it to assess the cumulative impact of the past four OPR adjustments (of 25 basis points each), given the lag effects of monetary policy on the economy.

Benedict Weerasena, research director at Bait- Al Amanah, said the pause was a largely unexpected boost for both businesses and consumers.

“It is a wise move to pause, and observe the impact of previous rate hikes on the economy,” he said. “There is always a possibility of overdoing OPR hikes, so holding off gives both consumers and businesses welcomed breathing space.”

Will BNM’s move backfire?

The respite that Malaysian consumers, businesses and BNM get from the pause in tightening may well be temporary.

The central bank explained its decision to maintain the OPR rate allows it to provide “an accommodative and supportive environment that allows for economic growth”.

While most quarters laud BNM’s pro-growth move, the more sceptical experts see it as the central bank anticipating global and domestic economic conditions to falter in the coming months.

A senior economist, who asked not to be named, warned that a pause in the hiking cycle at this juncture is not necessarily a positive sign. “It may mean that an economic slowdown or recession is on the horizon, and BNM is taking the necessary precautions.”

Euben Paracuelles of Nomura Holdings Inc, the lone analyst to accurately predict BNM’s decision in Bloomberg’s survey, said: “The pause marks the end of BNM’s hiking cycle because the growth outlook is deteriorating and led by weaker exports which, we have argued for a while, will have quick spillovers to domestic demand”.

Malaysian Institute of Economic Research (MIER) senior fellow Shankaran Nambiar expects to see global headwinds impacting the economy towards the second half of the year.

“The looming global recession, exacerbated by geo-political crises like the protracted Russia-Ukraine conflict, might pose supply-side and inflationary challenges to the economy in the second half of 2023,” he said.

This might force BNM’s hand in having to adjust interest rates later in the year.

The sentiment was echoed by UiTM Sabah economist Suffian Firdausi, who noted the economy would be impacted if a global shock were to cause inflation to rear its ugly head once more.

“Interest rates affect those with big-ticket commitments to the banks most. Any further hike in the interest rates would put further strain on their affordability and could impact domestic consumption,” he said.

Suffian said BNM’s OPR announcement was indicative of its expectations of the ringgit continuing to strengthen. “Pausing the rate hikes suggests that BNM is projecting a continued climb for the ringgit this year.”

Light at the end of the tunnel

Small and Medium Enterprises Association chairman William Ng welcomed BNM’s move to maintain the OPR, suggesting it could go even further and start reversing monetary policy hikes.

“We are beginning to see light at the end of the tunnel. Production is scaling up, logistical backlogs are clearing, and a normalisation in input costs is being aided by China’s reopening.

“We not only see an OPR hike as unnecessary, we argue that BNM can reduce interest rates, and encourage more business borrowing to further drive growth,” he said. - FMT