KUCHING (May 13): Despite being caught by surprise, analysts believe Bank Negara Malaysia’s (BNM) decision to increase its overnight policy rate (OPR) signify the start of more rate hikes to come this year.
According to analysts at MIDF Amanah Investment Bank Bhd (MIDF Research), the focus of BNM’s monetary policy setting is to ensure a sustainable recovery of Malaysia’s economy.
“With the rate of inflation hovering within BNM’s forecast, we opine there is less pressure for BNM to adopt aggressive policy tightening. At this point, we expect another 25 basis points rate hike to 2.25 per cent in the third quarter of this year (3Q22),” it said yesterday.
“However, the decision will be subject to the stability of economic growth, pace of inflation rate and improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.”
MIDF Research does not expect BNM to simply adjust OPR in response to any changes on the external front such as Fed’s monetary policy tightening and the recent weakening of ringgit against US dollars.
“Any decision to hike OPR will indicate BNM’s confidence in the country’s economic fundamentals including the stability of demand condition in the economy,” it added.
“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as the persistently high inflation and a further rise in household indebtedness.”
MIDF Research cited that the OPR rate hike came sooner than expectations – the market widely believed that any potential OPR hikes would take place in the second half of the year.
BNM has stated that it will begin reducing the degree of monetary accommodation in a measured and gradual manner. Contributory factors include firmer economic standings, inflationary pressures.
Separately, AmBank Economics noted that historically, BNM has instituted three rate hikes within 12 months, as can be seen back in 2005 and 2010.
In 2005, the OPR was raised from 2.70 per cent to three per cent. During this period, the headline averaged 3.3 per cent while GDP grew five per cent on average. In 2006, OPR was raised to 3.50 per cent.
Another one was in 2010, after the Global Financial Crisis. The OPR was lifted in March, May, and July 2010.
“In today’s scenario, given the rising pressure on interest rates differential plus a weakening cross rates besides cost pressures, we believe the door for another one– two rate hikes is within reach,” it said in its own analysis.
“With the decision to raise OPR will be data driven, we can expect the next OPR hike to be in July by another 25bps (probability of 70 per cent) and another in September by another 25bps (probability of 50 per cent) based on our current forward projection.”