More rate hikes ahead after GDP’s surprise upside in 2Q

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BNM has been relatively early in normalising rates – having hiked rates twice this year already – has given it the space to continue adopting a modest and gradual approach for now, an analyst observed. — AFP photo

 

KUALA LUMPUR: Two more interest hikes are likely during the Monetary Policy Committee (MPC) meetings in September and November this year after the second quarter (2Q) 2022 stellar gross domestic product (GDP) performance announced recently.

OCBC Bank economist Wellian Wiranto sees a good chance of another 25 basis points (bps) hike in the September MPC meeting, partly because of the incipient price pressures that are starting to show up more concretely.

“Even though there may now be whispers of a ‘fatter’ hike of, say, 50 bps, we continue to attach a low probability to that. The fact that Bank Negara Malaysia (BNM) has been relatively early in normalising rates – having hiked rates twice this year already – has given it the space to continue adopting a modest and gradual approach for now.

“Still, we do see a higher chance of another 25 bps hike in the last meeting of the year in November, which will put the overnight policy rate (OPR) at 2.75 per cent by the end of 2022,” he said in a regional shapshot report.

Wellian added that if core inflation picks up speed to above 3.5 per cent year-on-year (y-o-y) versus the latest 3.0 per cent in June, the likelihood of the November MPC hike will be more crystallised.

BNM governor Tan Sri Nor Shamsiah Mohd Yunus said the Malaysian economy has been absorbing the impact of the OPR hike quite well.

“It is very clear that we are no longer in a crisis,” she said.

“The momentum, in terms of loan repayments, has not been impacted,” she said, referring to the OPR hikes during a joint press conference with Department of Statistics Malaysia on 2Q GDP here today.

Malaysia has increased the OPR twice this year to 2.25 per cent from a low of 1.75 per cent.

As for the GDP, Wellian said the bank had been “too conservative” in its estimation of the underlying strength in the Malaysian economy as 2Q GDP turned out to be 8.9 per cent y-o-y.

The economist said the surge in private consumption was a robust 18.3 per cent versus 5.5 per cent in Q1. The recovery in the labour market over the period has also helped reinforce consumption after the unemployment rate declined further to 3.8 per cent in June versus a high of 4.8 per cent last year.

Overall, Wellian said the strength in 2Q should bode well for the underlying health in the economy as the country steps further into the second half of the year, which may look “decidedly less supportive” especially on the external front, possibly crimping exports.

“Still, given the strength in the GDP thus far, we remain comfortable with the full year forecast of 5.7 per cent y-o-y that we had in mind, even as the challenges of the second half of the year may look foreboding,” Wellian added.

MIDF Research, on the other hand, has revised 2022 GDP growth projection higher to 6.6 per cent from six per cent previously as it expects the positive growth momentum to continue in the second half amid the continued pick-up in consumer spending, improved business activities, and even sustained growth in the external demand.

It is, however, “wary of the possible downward risks” from external developments such as a weak Chinese recovery, recession risks, a sharper slowdown in the US and the global economy, the ongoing Ukraine war, escalation of geopolitical tensions, and high inflationary pressures globally from elevated commodity prices,” it said.

Moving forward, MIDF Research said Malaysia’s current account surplus should rebound firmly, driven by steady exports revenue from elevated global commodity prices and firm regional demand.

Malaysia’s current account remained in surplus and increased to RM4.4 billion in 2Q from a nine-year low of RM3.0 billion recorded in 1Q. — Bernama