MPC’s meeting to signal rate hike bias

Analysts will be looking for the signals the MPC’s statement gives 


BANK Negara Malaysia’s (BNM) is expected to keep its benchmark Overnight Policy Rate (OPR) steady at 1.75% at its first Monetary Policy Committee (MPC) meeting this year as focus remains on achieving recovery in economic growth amid risk of slowing external demand amid rising inflationary pressures. 

Core risk to consider will be rising inflationary pressures due to supply side disruptions and the spread of Omicron while financial markets fear a withdrawal of liquidity when the Federal Reserve starts normalising its interest rates this year. 

“BNM will likely keep the OPR unchanged but analysts will be looking for the signals the MPC’s statement gives on what to expect heading into the next MPC’s meeting in a couple of months. The statement will probably take note of the inflationary pressures the economy is facing, including the rising core inflation rate,” MARC Ratings Bhd chief economist Firdaos Rosli said. 

On the plus side, MARC expects Putrajaya will only resort to mild mobility restrictions, if any, to curb the spread of Omicron while external demand from major trading partners like China and Asean will remain strong as the region recovers. 

The rating firm noted that the silver lining to growth in 2022 could come from the Regional Comprehensive Economic Partnership. Although Malaysia has yet to ratify the agreement, MARC posits the Malaysian government will proceed with ratification and capitalise on the growing trade with China. 

Inflation will remain a major theme at MPC meetings this year due to gradual improvements in the labour market, continual supply constraints and inefficient existing price control and anti-profiteering mechanisms. 

“Policymakers need to consider the tradeoff between price and quantity. Having price controls will likely result in a reduction of supply and thus, prolong shortages. The better option would be to increase the supply and this could require some changes in our trade approach,” Firdaos told The Malaysian Reserve. Producer Price Index (PPI) has been trending at double-digits since April 2021 and will continue to be so in the first quarter of 2022 (1Q22).

MARC believes even if PPI normalises after 2Q22, inflation will remain persistent as producers transfer the rising production costs to consumers as domestic demand picks up. 

“We think there is a slight chance of BNM having to face somewhat of a monetary policy decision dilemma. If Covid-19 cases jump and cause bigger disruptions to supply chains, inflation could rise to a multi-decade high and derail the progress of Malaysia’s growth recovery. 

Under this scenario, we remain cautious about whether BNM would clamp down on inflation or keep its accommodative monetary policy stance intact. 

“If BNM tightens monetary policy to control inflation, this could depress demand and threaten economic recovery. It would mean more economic pain, which would consequently inflict more damage to the government’s already stressed balance sheet. 

As a result, we can expect more pressure to pile up on Malaysia’s sovereign credit rating,” the MARC statement read. 

Global banks like Standard Chartered plc and HSBC Holdings plc, in media briefings last week, expect BNM to raise the OPR by 50-75 basis points (bps) in the second half of this year (2H22) mainly to combat the inflationary pressure building. 

MIDF Research director and head of research Imran Yassin Md Yusof, however, believes the central bank will only raise the OPR by 25bps in 2H22 to ensure consumers are not financially overburdened. 

He said the direct beneficiary of the OPR hike will be the banking sector due to the fact that banks will see an increase in its net interest margin as an OPR hike translates to higher interest or financing rates. 

“This effect will normalise after some time as banks will also have to increase deposit rates as well. Consumers could see slightly higher interest or financing rates. With a 25bps hike, we believe the effect will be minimal and consumers should be able to absorb the slightly higher rates,” he said.