Expects more rate hikes from 8.9% GDP growth, say economists

This is driven by the incipient price pressures that are starting to show up more concretely

by ANIS HAZIM/graphic by TMR

THE upside surprise from the GDP in the second quarter of 2022 (2Q22) will lead to more rate hikes from the central bank, economists say.

Malaysia came in above expectations at 8.9% versus the market consensus’ expectation of 7% and exceeded the 5% GDP in the preceding quarter.

“On the monetary policy front, even before the upside beat in the 2Q22 GDP print, we already saw a good chance of a 25 basis points (bps) hike in the September Monetary Policy Committee (MPC) meeting,” OCBC Bank Bhd economist Wellian Wiranto said in a research note last Friday.

The economist said this is also driven by the incipient price pressures that are starting to show up more concretely.

He noted that there might be some whispers of a “fatter” hike of 50bps, but OCBC continues to attach a low probability to that.

“The fact that Bank Negara Malaysia (BNM) has been relatively early in normalising rates — having hiked rates twice this year already — gives it the space to continue adopting a modest and gradual approach for now,” he said.

Nevertheless, OCBC foresees a higher chance of another 25bps hike in the last meeting of the year in November, which would put the Overnight Policy Rate (OPR) at 2.75% by the end of 2022.

“In particular, if core inflation picks up speed to above 3.5% year-on-year (YoY) by then, compared to the latest 3% print of June, the likelihood of the November MPC hike will be a lot more crystallised,” he added.

On the 2Q22 GDP, he said that the strong result could be seen as a continued pick-up in growth momentum that was seen in 1Q22

“This should bode well for the underlying strength in the economy as we step further into the second half of the year (2H22), which may look decidedly less supportive, especially on the external front that might crimp exports more,” he noted.

OCBC currently remains comfortable with the full-year forecast of 5.7% YoY despite the strong 2Q22 GDP.

The Employees Provident Fund (EPF) head of economics and research Dr Mohd Afzanizam Abdul Rashid said the 2Q22 GDP came in higher than expected which seems that the prevailing OPR of 2.25% is quite on the low side.

“We can expect BNM to increase it further 25bps in the upcoming MPC meeting in September,” he told The Malaysian Reserve (TMR).

However, he said that the country is on track to achieve the projected growth of 5.3% to 6.3% for the entire year following the high GDP growth.

Socio-Economic Research Centre ED Lee Heng Guie, on the other hand, sees the recovery phase for several sectors remain uneven in 2Q22.

“The construction sector has rebounded but the strength is still very weak, and the mining sector also declined,” Lee told TMR.

He also questioned whether Malaysia can maintain the GDP growth in the upcoming quarter, especially when it is dependent on consumer spending.

“So will the GDP growth continue going into 2H22 and in 2023 — the question is whether we can hold the growth.

“Most likely, I think we have to keep watching closely to see whether consumer spending will go down or not,” he noted.

Lee raised his full-year GDP estimation between 6% to 6.5% from 5.2% previously following the GDP growth in 2Q22.

Separately, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said Malaysia’s GDP growth in 2Q22 is suggesting equally strong growth in the upcoming 3Q22.

“As such, the government is confident the Malaysian economy can achieve the official 2022 GDP projection of 5.3% to 6.3%,” Tengku Zafrul said in a statement last Friday.

According to him, the 2Q22 GDP outperformed the economic performance of several developed and regional countries such as China at 0.4%, the US (1.6%), Europe (4%), South Korea (2.9%), Singapore (4.4%), Indonesia (5.4%) and the Philippines (7.4%).

Moving forward, he expects that Malaysia’s economic growth will be supported by more vigorous economic and social activities as well as strong domestic and foreign demand.

“Economic growth momentum is expected to remain strong in 3Q22, driven by encouraging performance in foreign trade and tourism,” he added.

However, the government remains cautious for the 2H22 as the economic outlook is still subjected to risks of slower growth due to global economic uncertainty including the prolonged Russia-Ukraine conflict, China’s economic slowdown and higher inflationary pressure.