OPR hike on the cards this week?

The central bank might do so to curb rising inflationary pressures, the outflow of funds, strengthen the ringgit and to ensure continued economic recovery


ANALYSTS are expecting Bank Negara Malaysia (BNM) to raise the Overnight Policy Rate (OPR) by at least 25 basis points (bps) on tomorrow to curb rising inflationary pressures, the outflow of funds, strengthen the ringgit, as well as to ensure continued economic recovery.

Last May, BNM’s Monetary Policy Committee (MPC) at its meeting decided to raise the OPR by 25bps to 2% from 1.75% in July 2020.

Bank Islam Malaysia chief economist Dr Mohd Afzanizam Abdul Rashid projected that BNM may increase the OPR by 25bps this week, as there is growing pressure on the central bank to hike rates sooner than later in the face of an aggressive US Federal Reserve.

He added that a hike in interest rates is inevitable to ensure monetary policy remains accommodative to support sustainable economic growth in a stable price environment.

“The justification would be — negative real rates of return (OPR of 2% less inflation of 2.8% equal to -0.8%). Therefore, higher OPR should help to reduce the gap to incentivise the savers to save money in banks.  

“Apart from that, this would also build monetary policy space, where higher OPR would mean BNM will acquire more policy space to respond to future shocks.  

“This is especially when talks of possible recession in the US is gaining traction,” he told The Malaysian Reserve (TMR) in a phone interview yesterday.

Mohd Afzanizam said he doubts BNM will follow a similar trajectory as the central bank will put more weight on the domestic economy rather than keeping track with the US rates.  

He noted that the central bank is always pro-growth in its approach and therefore, any adjustment to OPR should not deter the growth momentum.

Meanwhile, Putra Business School Associate Prof Dr Ahmed Razman Abdul Latiff opined that BNM will raise OPR by another 25bps to counter the increasing inflation rate which has reached 2.8% last month.

He said this is necessary to ensure the economy will not grow too fast, which will inflate the inflation rate further.

Another industry analyst, who preferred to remain anonymous, told TMR that BNM’s move to raise the OPR in May 2022 by 25bps to 2% was commendable as the central bank was proactive in curbing rising inflation in the country.

He added that the central bank implemented monetary policy according to the suitability of the country’s economy with the increase in the OPR in May was largely linked to the country’s better economic growth momentum with GDP growing at 5%.

He also explained that the OPR rate of 1.75%, the lowest rate in history, was no longer appropriate as interest rates were too low for a long time while the economy was starting to recover and could have a negative impact on the country’s economy.

“Low interest rates do not encourage savings and it can provide an incentive for traders to take higher risks in search of higher returns.

“Generally, BNM administers monetary policy according to our own country’s model,” he said, while adding that there would be another round of OPR hike in September this year.

BNM’s move to raise the OPR in May 2022 by 25bps to 2% was commendable as the central bank was proactive in curbing rising inflation in the country, an analyst says (pic: MUHD AMIN NAHARUL/TMR)

UOB Research senior economist Julia Goh said there is room for BNM to follow-through with another 25bps rate hike at both tomorrow and Sept 8 MPC meetings, given signs of broader second-round effects on consumer prices, ongoing domestic recovery and latest developments in global financial markets.

In a recent note, Goh said updated OPR projections were 2.5% by end-2022 and 3% by end-2023.

“Even after projected hikes of 75bps for this year, monetary policy would still be accommodative as it only reverses part of the 125bps of rate cuts during the pandemic,” she noted.

Meanwhile, Hong Leong Investment Bank Bhd (HLIB) said BNM had raised the OPR by 25bps to 2% back in May, as they viewed that the transition to endemicity had put the domestic economy on a firmer path.  

In the second half of 2022 (2H22), HLIB has maintained its expectation for two 25bps rate hikes in July and September MPC meetings.

The research firm said this will bring OPR to 2.5% by end-2022 as BNM would want to take advantage of better GDP print expected in the second quarter of 2022, which will be announced in August this year.

“In addition, rising inflationary pressures from supply side pressures, minimum wage hike and stronger economic activity as the economy moves to endemicity will also put BNM on alert for a secondary round effect of inflationary pressures,” it said in a note.

Kenanga Research, on the other hand, is of the view that inflation will remain at the global level in 2H22 as the disruption of the global supply chain, which is a major factor triggering inflation, is still far from over, as rising fuel continues to put pressure on inflation.  

In a recent note, the research firm said with inflation seemingly getting out of control, policymakers have no choice but to make inflation control their top priority by raising rates and initiating quantitative tightening.  

“Asset prices (especially bonds, equities and alternative assets such as cryptocurrencies), which have been boosted by very loose monetary policy in recent years, are now experiencing a major setback.  

“This makes the investment environment very challenging for the remainder of 2022 (possibly until 2023 as well),” it said.

Malaysia’s OPR had been at 3.25% since January 2018, before a 25bps cut to 3% in May 2019.

After four back-to-back cuts totalling 125bps between January and July 2020, the OPR fell to a record low of 1.75%.

If BNM raises the OPR by 25bps at its next scheduled meeting tomorrow, it will mark the first consecutive increase since mid-2010, when interest rates were normalised following the recovery from the 2008 global financial crisis.