by RUPINDER SINGH / pic by MUHD AMIN NAHARUL
BANK Negara Malaysia (BNM), which kept the Overnight Policy Rate (OPR) at 2.75% today, may raise the interest rate by another 25 basis points (bps) in March to 3%, said MIDF Amanah Investment Bank Bhd (MIDF Research).
“With the rising core inflation trend and stronger-than-expected domestic demand, we expect the central bank to restore its monetary bullets to pre-pandemic levels to 3% by March 2023,” it said in a note today.
MIDF Research also opined that the central bank may normalise its Statutory Reserve Requirement (SRR) from 2% to 3% this year.
The SRR rate, which requires banking institutions to maintain balances in their statutory reserve accounts equivalent to a certain proportion of their eligible liabilities at no interest, was reduced to 2% since March 2020.
However, MIDF Research said the decision will be subjected to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.
“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness,” it said.
No Rate Hike, against Market Consensus
Earlier today, BNM surprised the market as it maintained the OPR at 2.75%, in its first Monetary Policy Meeting of 2023.
In the Monetary Policy Statement, BNM highlighted that the global economy continues to be pressured by cost inflation, tighter global financial conditions and Covid-19-related disruptions in China.
BNM said central banks across the globe continue embarking contractionary monetary policy albeit with a slower pace as to manage inflationary pressure particularly driven by strong demand and tight labour market.
The central bank also highlighted growth in China to improve following the reopening of the country.
MIDF Research reckons that BNM is taking a wait-and-see approach to assess the market performances after a 100bps increase in rate hike made last year.
“However, we believe the possibility for further normalisation of monetary policy remains, given that domestic economic data still showing an upbeat momentum,” it added.
BNM Hinted Strong and Robust 2022 GDP Growth
In its statement, BNM pointed out that economic data still indicates a sound expansionary trend in the fourth quarter of 2022 (4Q22), particularly driven by resilient domestic demand.
The central bank foresees 2022 GDP growth to exceed 7%, while 2023 growth is predicted to moderate amid slower global demand.
Household spending, it said, continues to be supported by improving labour market conditions and steady income growth. BNM also highlighted investment prospects to be supported by the realisation of multi-year and infra projects and further pick up in tourism-related activities.
On downside risks, BNM highlighted weaker-than-expected global growth; higher risk aversion in global financial markets; aggressive tightening of monetary policy in major economies; escalation of geopolitical conflicts; and supply chain disruptions.
Inflation to Stay at Elevated Levels
On the price developments, BNM viewed headline inflation has reached its peak in 3Q22, and foresees headline and core inflation to moderate but remain at elevated levels amid demand and cost pressures.
“We are in the same tune with BNM especially on the stance of the new government on fuel subsidy policy which will determine the direction of Malaysia’s inflation outlook for 2023,” said MIDF Research.
With the existing price controls and fuel subsidies, the research house said, Malaysia’s inflation remains manageable and containable.
Ringgit to Reach RM4.23 against the Dollar by End-2023
MIDF Research said the strong US dollar has been the main factor for depreciation of most currencies in 2022, on the back of faster-than-expected pace of interest rate hikes by the US Federal Reserve (Fed).
As the central bank indicated signs of a slower pace, MIDF Research noticed modest appreciation of other currencies including the ringgit since November 2022.
“Fundamentally, the ringgit is in good position as domestic economy stays on upbeat momentum, and as net exporter of crude petroleum, liquefied natural gas (LNG) and palm oil, Malaysia stands to benefit from the elevated global commodity prices,” it said.
On top of that, it said, lower domestic political temperature after the 15th General Election (GE15) improves market confidence and inject political stability to Malaysia’s economy as well as the ringgit.
“Moving forward, we foresee ringgit to average higher at RM4.30 per US$1 and ending the year 2023 at RM4.23,” it added.