PETALING JAYA: Bank Negara has raised its benchmark interest rate for the third time by 25 basis points (bps), but this is unlikely to be the last round of hike, according to economists.
Malaysia’s headline inflation rose for four consecutive months to 4.4% in July, with the food inflation hitting the record high of 6.9%.
Economists anticipated the overnight policy rate (OPR) to reach the pre-pandemic level of 3% by the first half of 2023. To reach that level, the OPR will need to rise by 50 bps, either in one or two upcoming meetings by the Monetary Policy Committee (MPC) of Bank Negara.
Interestingly, the MPC said yesterday that it is not on “any pre-set course”, hinting at the possibility of taking a pause or reducing the OPR, if necessary.
The committee added that it would continue to assess evolving conditions and their implications on the overall outlook for domestic inflation and growth.
As predicted by the market, Bank Negara hiked the OPR by 25 bps to 2.5% from 2.25%
yesterday, as it sought to end the era of cheap money policy.
The ceiling and floor rates of the OPR were correspondingly increased to 2.75% and 2.25%, respectively.
There will likely be two more rounds of hikes – a 25-bps hike in November and January, according to economist Paolo Casadio.
Casadio, who is a professor in HELP University, said the country’s “still moderate”
inflation provides Bank Negara the advantage of hiking the OPR in a “step-by-step and smooth” manner.
This is opposed to the aggressive rate hikes in the United States and Europe.
“However, it will be the main problem of 2023 for Bank Negara on whether to turn the monetary policy stance to a restrictive one or not.
“Bank Negara will have to decide on its monetary policy stance based on different scenarios of the international as well as local economy,” he told StarBiz.
With the latest hike, Casadio said the country has reached the lower bound of the
“normalisation range”, which he quantified in the interval 2.5% to 3%.
“The range corresponds – based on a monetary policy reaction function and the given medium-term evolution of the economy – to what we can identify as the neutral stance.
“Based on its latest statement, Bank Negara considers the monetary policy stance as still accommodative and supportive of growth.
“In contrast, I think we are passing into a neutral stance,” he added.
The hike came ahead of the decision of the European Central Bank to raise its rates, amid the eurozone’s battle against soaring inflation.
On Sept 7, the central bank of Canada raised its policy rate by 75 bps, with officials signalling that more rate hikes in coming months.
In a statement yesterday, Bank Negara said central banks are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures.
In particular, it said the aggressive adjustments in US interest rates have contributed to a strong US dollar environment.
“They have resulted in higher volatility in financial markets, affecting other major and emerging market currencies, including the ringgit.
“Going forward, global growth is expected to face challenges from the impact of monetary policy tightening in most economies, and pandemic management measures in China,” it said.
As for Malaysia, Bank Negara said indicators point to continued growth, underpinned by support from private sector spending.
The labour market conditions and income prospects remain positive, with unemployment and underemployment declining further.
Headline inflation is projected to peak in the third quarter of this year before moderating, according to Bank Negara.
This is due to dissipating base effects and in line with the expected easing of global commodity prices.
Year-to-date, headline inflation has averaged at 2.8%.
“Underlying inflation, as measured by core inflation, is expected to average closer to the upper end of the 2% to 3% forecast range in 2022, with some signs of demand-driven pressures amid the high-cost environment.
“The extent of upward pressures to inflation will remain partly contained by existing price controls, fuel subsidies, and the prevailing spare capacity in the economy.
“The inflation outlook, however, continues to be subject to domestic policy measures, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions,” said the central bank.
With the positive growth prospects for the country’s economy remaining intact, the MPC said it had decided to further adjust the degree of monetary accommodation.
At the current OPR level, it said the stance of monetary policy continues to remain accommodative and supportive of economic growth.
“Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability,” said the MPC.
MIDF Research, in a note yesterday, pointed out that the current focus of Bank Negara’s monetary policy setting is to ensure a sustainable recovery of the country’s economy.
With the rising core inflation trend and stronger-than-expected domestic demand, the research house said Bank Negara would likely go for another 25 bps hike in the final MPC meeting in November, bringing the OPR to 2.75%.
“However, the decision will be subjected to the stability of economic growth, the pace of price increases and 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,” it said.
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