Moody’s Analytics: Rising inflation pressure leads to BNM’s decision

 

by AZALEA AZUAR

BANK Negara Malaysia’s (BNM) surprise decision to increase its Overnight Policy Rate by 25 basis points to 2% from 1.75% was on the back of rising inflation pressures, according to Moody’s Analytics.

The Russian invasion of Ukraine, together with China’s zero-Covid policy, has caused supply-chain disruptions and an uptick in global commodity prices. “BNM noted several central banks are expected to adjust monetary policy settings ‘at a faster pace’, hinting at concerns over capital outflows and the weakening ringgit,” said Moody’s Analytics in a statement today.

According to Moody’s latest “Analytics Asia Pacific Economic Preview” report, the country’s industrial production in March this year increased by 5.1% year-on-year (YoY) compared to in February which was 4%.

The bank also said that the country’s inflation will be controlled by the economy and the labour market, which is expected to strengthen due to the reopening of the international borders and the loosening of Covid-19 restrictions. 

This in turn, allows consumer and investor spending to gain momentum.

However, inflation remains relatively subdued and this renders BNM’s decision to be mainly pre-emptive.

“Higher food and fuel prices pushed the consumer price index to 2.2% YoY in March. 

“In comparison, consumer prices in neighbouring Singapore, Thailand and the Philippines rose between 4.5% and 5.5% in April,” it added.

Being a net exporter of oil, Malaysia is able to subsidise its domestic prices to prevent its prices from skyrocketing due to the high global oil prices.

Malaysia’s GDP for the first quarter of 2022 (1Q22) came in stronger than expected at 5% compared to its previous quarter performance in 4Q21 which was 3.6% YoY.

On the other hand, Moody’s Analytics warned that Malaysia is subjected to increasing food prices escalating from the Russia-Ukraine war where the prices of food and non-alcoholic beverages have soared by 4% in March. The same with the rest of the Asia Pacific region.

Apart from Malaysia, the report indicated that Japan’s economy for the 1Q22 performed better.

“We expect the economy to have contracted 0.5% quarter-on-quarter after its 1.1% expansion in the prior quarter. The spread of the Omicron variant of Covid-19 dented consumer confidence and kept domestic spending on the back foot in the early months of the year,” it said.

Japan still suffers from weak auto manufacturing and has sapped momentum from industrial production even with the swift rollout of booster vaccines which has partially reduced the outbreak towards the end of 1Q22.

The report is positive that soft domestic demand and a widening trade deficit will boost the country’s economic contraction in the quarter.