Will BNM surprise by resuming OPR hikes?

 

Based on the results of a poll of economists by Bloomberg on the direction of the overnight policy rate (OPR), the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) will likely breeze through its two-day meeting which started yesterday.

Ahead of the MPC meeting that ends today, 16 out of 18 economists polled by Bloomberg appear confident the central bank will not make any changes to the OPR, maintaining it at 2.75%.

The central bank had paused its hiking cycle at its last two MPC meetings in January and March following four consecutive 25 basis point (bps) hikes in 2022 in a bid to tame inflation and keep pace with the US Federal Reserve’s aggressive rate hikes.

“At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth,” BNM said when it announced a pause in the OPR hiking cycle on Jan 19.

BNM explained the pause would allow it to assess the impact of the cumulative OPR adjustments, given the lag effects of monetary policy on the economy. Since then, policy makers at the central bank have had almost four months to ponder the impact of the OPR hikes.

Economists got it wrong

The market, investors and business sector are anxiously awaiting BNM’s OPR announcement at 3pm today. However, while the betting is on an OPR pause, there is a possibility BNM will pull a surprise and resume its hiking cycle.

Well, it was only in January that the economists polled by Bloomberg ended up with egg on their faces. In a similar Bloomberg survey just before the MPC meeting, just one out of 18 economists correctly forecast that BNM would halt its tightening cycle. Yes, only one.

Outside of the latest Bloomberg poll, United Overseas Bank (UOB) is one institution that holds the contrarian view. It anticipates another OPR increase of 25bps to 3% and for it to stay at that level, according to its note last Friday.

Its senior economist and senior vice-president Alvin Liew said there is room for further normalisation of monetary policy, on the back of sticky core inflationary pressures, still positive domestic growth momentum and domestic financial stability.

Another bank that has bucked the trend is RHB Investment Bank, which has maintained its 2023 peak OPR forecast at 3.25% versus the current 2.75%.

RHB IB said it took this view based on “persistent core inflationary pressures”, the nominal effective exchange rate on a steep downward trajectory, and the resilient domestic economy.

Essentially, what UOB and RHB’s economic experts are saying is that Malaysia has not yet tamed the inflation beast. Nevertheless, there remains growth momentum in the economy, which has proven to be resilient thus far.

It also has a stable banking sector in contrast to the fragility of the US banking system, which saw the latest bank failure in First Republic Bank which was seized by regulators and its assets sold to JP Morgan Chase & Co on Monday.

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In other words, there is still some wiggle room for BNM to bring the OPR back to the pre-pandemic level of 3% or slightly beyond.

However, the window for a possible increase in the OPR is closing as the “external front has become quite wobbly”, said Bank Muamalat chief economist Afzanizam Rashid in a recent note.

But why should BNM raise the OPR rate considering there are clear signs that the dreaded “R” word – recession – is beginning to rear its ugly head?

For one, US economic growth slowed in the first quarter by more than expected to 1.1% on an annualised rate from a 2.6% expansion in the previous quarter. Though US inflation has fallen in recent months, it is still at a historically high level.

A number of its regional banks are showing signs of stress, heightening fears of a return of the banking crisis that ensued in March.

Markets have also been spooked by comments from Treasury Secretary Janet Yellen that the US may hit the debt ceiling sooner than expected. A recession in the US means bad news for Malaysia.

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Pressure on BNM

The Fed’s two-day policy meeting, which kicked off yesterday, is expected to conclude later today with the central bank announcing another 25 basis-point rate hike. As per the CME Group’s FedWatch tool, traders are pricing in 97% chance of a rate hike.

This will inevitably pile the pressure on BNM, and the ringgit, if it decides to continue to keep the OPR steady at today’s meeting. The US central bank has increased the federal funds rate from nearly zero in March 2022 to a range of 4.75% to 5% as of March.

Contrast this with BNM which only hiked the OPR a total of 1% from 1.75% to 2.75% last year.

There is a school of thought that BNM’s moderate pace of monetary tightening last year coupled with a surprise pause in January will handicap the central bank in the likely event the Malaysian economy encounters a slowdown or, even worse, a severe recession.

The US and other countries which embarked on aggressive tightening to bring down surging inflation now have healthy buffer to cut rates to stimulate the economy when a recession hits. That does not appear to be the case with BNM as its moderate monetary tightening may have put it in an uncomfortable position.

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If the expected economic slowdown is mild, it may well dodge the bullet. But if a severe recession hits, BNM may find itself with insufficient ammunition to fight the economic battle.

That is why BNM, led by governor Nor Shamsiah Mohd Yunus, may have to consider resuming its OPR hikes. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.