The OPR is way more aggressive than the market consensus of a 25bps hike in the OPR in the 3Q22, economist says 

by NUR HANANI AZMAN 

STANDARD Chartered Bank (StanChart) expects Bank Negara Malaysia (BNM) to raise interest rates by 75 basis points (bps) in the second half of 2022 (2H22) as economic activity gains traction in 1H22. 

The international bank expects BNM to start normalising its Overnight Policy Rate (OPR) in the third quarter of 2022 (3Q22), with two 25bps hikes in the period and deliver another 25bps increase in the 4Q22, taking the policy rate to 2.5% by the end of the year. 

The current OPR now stands at 1.75%. 

StanChart chief economist for Asean and South Asia Lee Wee Kok view on the OPR is way more aggressive than the market consensus of a 25bps hike in the OPR in the 3Q22 (to 2% in 2022). 

He said while the unemployment picture in Malaysia has improved, the unemployment rate remained high at 4.5% as at September 2021 versus the pre-Covid-19 level of 3% and the output gap may close only in late 2022. 

“As such, we expect BNM to refrain from tightening policy in the 1H22 while acknowledging the higher growth and underlying inflation trajectory. However, given policy rates are now at historical lows, we expect BNM to start normalising policy in the 3Q. 

“Thereafter, we expect the central bank to keep the policy rate unchanged in 2023 as growth plateaus,” he told reporters during StanChart’s Global Research Briefing 2022: 

1H22 Global and Malaysia Outlook yesterday. Lee added BNM will refrain from tightening policy in 1H22 due to the nascent economic recovery even as the headline Consumer Price Index may have risen to above 3% year-on-year (YoY) in the 4Q21 (on lapsing electricity discounts).

StanChart lowered its 2021 inflation forecast to 2.5% (from 2.8%) due to subsidies but raised its 2022 forecast to 2% from 1.6% to reflect the lower base effect and the economic recovery. 

“We expect core inflation to rise to 1.4% in 2022 from 0.7% in 2021,” said Lee. 

StanChart expects Malaysia’s GDP growth to recover to 6.2% in 2022 from 3.5% in 2021. 

Lee sees the economy moving back towards trend growth in 2022, with a high vaccination rate-limiting the risk of severe lockdowns, barring the emergence of a very challenging Covid-19 variant. 

“External demand will be a strong source of support for the economy this year. While a high base effect may weigh on 2022 growth readings and the emergence of new variants may be a setback, ultimately global reopening should sustain external demand. 

“Domestic demand is likely to catch up. As of 3Q21, household spending was still 6.5% below 4Q19 levels. We expect private consumption to rise 8% YoY in 2022, supported by an easing of mobility restrictions, improved job prospects and a better wage outlook,” he added. 

The bank expects investment activity to pick up strongly with improved clarity on domestic economic reopening and higher construction activity. As of the 3Q21, overall investment was 22% below the 4Q19 level. 

Disbursed loans (excluding household and financial institution loans) rose 32% YoY in the 3Q21, with the bulk of loans disbursed to the manufacturing sector. 

StanChart stated public investment should be supported by high budget allocation and ongoing projects such as Mass Rapid Transit and Light Rail Transit lines and digital infrastructure. 

Lee said Budget 2022 remains expansionary with spending, excluding Covid-19 funds, projected to increase 10%. 

“The fiscal deficit is projected to narrow to 6% of GDP in 2022 from 6.5% in 2021. Excluding Covid-19 funds, the deficit would be higher at 4.5% in 2022, versus 3.9% in 2021. 

“The federal government’s revenue assumption for 2022 appears moderate, at 14.3% of GDP. We see revenue rising due to better collection as growth recovers in 2022, as well as a one-off revenue from the windfall tax, which is estimated to raise 0.4% of GDP,” he said. 

Ringgit to Improve to 4.15 

StanChart expects the ringgit to trade at 4.20 versus the US dollar in 1H22 and improve further to the 4.15 level in the 2H. 

StanChart’s Head of Asean and South Asia FX research Divya Devesh said the projection was made based on the positive drivers which included stronger commodity prices, a recovery in tourism and encouraging foreign direct investment flows into Malaysia. 

“In the past 18 months, commodities have had a very strong run and translated into improved terms of trade for Malaysia. Malaysia’s export performance has been very strong. The trade balance has improved significantly. For the current account, we think the surplus will remain quite strong this year,” he said.