BNM likely to raise OPR by 50 basis points in 1Q2023 – Bank Islam

Bank Islam Malaysia Bhd forecast the overnight policy rate (OPR) to increase by 50 basis points (bps) in the first quarter of this year.

The bank said Bank Negara Malaysia (BNM) is expected to raise the rate by 25 bps in its January meeting tomorrow and another 25 bps in the March meeting, thereby bringing the OPR to its new terminal rate of 3.25 per cent in line with the industry standard.

Chief economist Firdaos Rosli said BNM would subsequently pause the hike and the OPR would likely remain unchanged throughout the second half of this year sans heightening global recessionary risk. 

“BNM will probably reassess the situation (tightening interest rate cycle) to see where the global economy’s direction is going, in particular in the Euro area, because it is too uncomfortable for such a large economy to be going flat for 2023 (the World Bank anticipates its growth of 0.0 per cent as at January 2023),” he told reporters in his “2023 Economic Outlook: When Prices Are Entrenched” presentation here today. 

He said keeping the OPR low for too long could pose a macroeconomic imbalance amid excessive risk-taking activities.

Firdaos said consecutive hikes in the rate, notwithstanding the impact on the overall borrowing cost to the Malaysian economy, were meant to gradually remove the excessive monetary accommodation rather than to tame inflation.

He said BNM has reiterated that the reduction in the degree of monetary accommodation would be measured gradually. 

On growth, Firdaos said that Bank Islam is projecting Malaysia’s financial year 2022 (FY2022) to record 8.1 per cent, exceeding the official projections of the range between 6.5 per cent to seven per cent, amid stronger-than-expected third quarter (3Q2022) performance. 

“However, growth headwinds abound in 2023 and we believe that Malaysia’s real gross domestic product (GDP) growth would moderate to 4.5 per cent, steeper than others in the region. 

“The World Bank’s January 2023 forecast shares a similar view where Malaysia’s growth is expected to rise at four per cent in 2023 versus 7.8 per cent in 2022,” he said.

Meanwhile, Bank Islam posited that Malaysia’s inflation peaked in 2022 and would moderate amid favourable US dollar-ringgit exchange rates and base effects. 

The bank anticipated that the ringgit could trade at RM4.28 versus the US dollar by end of 2023 (2022: RM4.40) supported by resilient growth and the intensified China’s economic reopening.

“Prices will remain elevated in 2023 (and) the bank forecasts that the headline inflation to average three per cent in 2023 (2022: 3.4 per cent) under the assumption that the government maintains the current fuel subsidy,” Firdaos said.

However, he said inflation would inevitably trend higher than the bank’s baseline of three per cent if the government proceeded with subsidy rationalisation in 2023 as retail oil prices increase. 

“The bank expects that consumer price index (CPI) will increase by 0.42 per cent above the baseline for every 10 cents increase in RON95,” he said, adding that options to cut spending in 2023 are limited. 

He said with the anticipation of higher development expenditure, Bank Islam forecast the Malaysian Government Securities (MGS) and Government Investment Issues (GII) issuance to be higher at RM185 billion from RM175 billion in 2022.

“The redemption is expected to be RM83.3 billion (2022: RM78.8 billion). 

“Besides, a higher debt service charges ratio would likely follow suit, rising in tandem with a higher interest rate,” he said.

Furthermore, he said Bank Islam predicted the debt (MGS, GII and Malaysian Islamic Treasury Bills, MITB) to the GDP ratio to inch closer to the statutory debt limit (65 per cent) at 64.1 per cent in 2023 (2022: 63.3 per cent). — BERNAMA