BNM may want to hold OPR amid Russia-Ukraine conflict

The ongoing war could potentially derail the economic recovery path

By ASILA JALIL / Pic By MUHD AMIN NAHARUL

BANK Negara Malaysia (BNM) may want to keep the Overnight Policy Rate (OPR) unchanged up until the second half of 2022 (2H22) to see how the conflict between Russia and Ukraine evolves.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said there is a possibility that the war could potentially derail the economic recovery path and the central bank may want to wait and see before making any changes to its policy stance.

He said the central bank has quite a delicate balancing act to undertake. On one hand, the domestic economy is improving with more jobs being created and income growth. So, keeping the rates too low for too long could do more harm than good.

On the other hand, the war in Ukraine could potentially evolve into further tension with the Western allies especially when the economic sanction may not be an effective means to deter the military aggression by the Russian.

“I think the BNM might want to wait and therefore, at the upcoming Monetary Policy Committee (MPC) meeting in May, they may want to keep the OPR unchanged,” he told The Malaysian Reserve (TMR) recently.

He added that the war has resulted in a spike in energy prices which then could feed into inflation. If inflation becomes excessively high for a prolonged period, he said it would have an impact on growth momentum.

“Beyond inflation, heightened uncertainties are always bad for business and the market,” Mohd Afzanizam said.

China’s lockdown measures to contain the spread of the Covid-19 virus has economists and analysts worried it may impact economic activity quite badly. China is a major trade and investment partner of Malaysia.

Furthermore, in a note recently, RHB Research had anticipated for economic activity in Malaysia to have slowed down in the first quarter of 2022 (1Q22).

Group chief economist and head of market research Dr Sailesh K Jha stated that Malaysia’s 1Q22 eco- nomic performance will undergo a soft patch with February’s and March’s IP data points likely to weaken further.

MARC Ratings Bhd chief economist Firdaos Rosli opined that BNM would start to raise the benchmark rate in 2H22 or when demand recovery is solid.

“Policy normalisation should not lead to premature or incomplete recovery,” he told TMR.

Despite the war between Ukraine and Russia, the ratings agency stands by its latest estimate of 5.7% growth for Malaysia this year.

“Notwithstanding the downside risks, it is still too early to revise our 2022 estimate as the impact appears indirect.

“It all depends on how quickly the situation develops and how persistent the fallout in the external sector would affect Malaysia’s growth in the year,” he said.

He added that any downward revision is unlikely to be as aggressive as in the past two years.

In the recent MPC’s meeting earlier this month, the central bank decided to maintain the OPR at 1.75% after evaluating factors including the Russia-Ukraine conflict and lingering concern over the Covid-19 pandemic.

The OPR has remained unchanged since July 2020.