Bank Negara raises OPR again by 25bps to 2.75%

Fourth consecutive rate hike meant to stem inflationary pressures and encourage economic activity

THE Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided today to increase the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.75% to manage inflationary pressures.

This is MPC’s fourth consecutive 25bps OPR hike this year, bringing year-to-date (YTD) increase to 100bps.

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3% and 2.5%, respectively.

In a statement, BNM said the global economy continues to be weighed down by rising cost pressures, tighter global financial conditions and strict containment measures in China.

The central bank said these factors more than offset the support from positive labour market conditions, and the full reopening of most economies and international borders.

“Inflationary pressures were more persistent than expected due to strong demand, tight labour markets and elevated commodity prices, despite improvements in global supply chain conditions.

“Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures. In particular, continued aggressive adjustments in the US interest rates and expectations of a higher terminal rate in the US, have contributed to a persistently strong US dollar environment,” BNM said.

This, the central bank said, has resulted in higher volatility in financial markets, affecting other major and emerging market currencies, including the ringgit.

Going forward, it said, the global growth outlook will continue to face headwinds from tighter financial conditions amid elevated inflation in major economies and the domestic challenges in China.

It said the growth outlook remains subject to downside risks, including escalation of geopolitical tensions, worsening of domestic headwinds in China and potential energy rationing in Europe.

“For the Malaysian economy, latest indicators show that economic activity strengthened further in the third quarter (3Q), driven primarily by robust domestic demand.

“Going forward, despite the challenging global environment, domestic demand will remain the key driver of growth,” it stated.

BNM believes that household spending will continue to be underpinned by improvements in labour market conditions and income prospects.

Tourist arrivals have increased following the reopening of international borders and will further lift tourism-related sectors. Investment activities and prospects will be supported by the realisation of multi-year projects.

Nevertheless, it said that external demand is expected to moderate following softening global growth.

“Despite bouts of heightened volatility in the global financial and foreign exchange markets, these developments are not expected to derail Malaysia’s growth,” it said.

BNM said domestic liquidity remains sufficient, with continued orderly functioning of the financial and foreign exchange markets. Financial institutions also continue to operate with strong capital and liquidity buffers. These will ensure financial intermediation remains supportive of the economy.

However, it noted that downside risks to the domestic economy continue to stem from weaker-than-expected global growth; higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies; further escalation of geopolitical conflicts; and worsening supply chain disruptions.

In line with earlier assessments, BNM said, headline inflation is likely to have peaked in 3Q 2022 and is expected to moderate thereafter, albeit remaining elevated.

“Underlying inflation, as measured by core inflation, is projected to average closer to the upper end of the 2%-3% forecast range in 2022, having averaged 2.7% YTD, given some demand-driven price pressures amid the high-cost environment.”

Moving into 2023, BNM said headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as any changes to domestic policy measures.

“The extent of upward pressures to inflation will remain partly contained by existing price controls, subsidies and the remaining spare capacity in the economy,” it said.

The balance of risk to the inflation outlook in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions.

“Against the backdrop of continued positive growth prospects for the Malaysian economy, the MPC decided to further adjust the degree of monetary accommodation. The adjustment would also pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth,” it explained.

At the current OPR level, BNM said the stance of monetary policy remains accommodative and supportive of economic growth.

“The MPC is not on any pre-set course, which means that monetary policy decisions will continue to depend on evolving conditions and their implications on the overall outlook to domestic inflation and growth.

“Any adjustments to the monetary policy settings going forward would continue to be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability,” it concluded. — TMR