Thursday 28 Mar 2024
By
main news image

KUALA LUMPUR (May 6) : Bank Negara Malaysia (BNM) is expected to hike rates soon on improved economic conditions and inflationary pressure, said some economists on Thursday (May 5).

This was after the US’ central bank announced its biggest interest rate increase in more than two decades to fight inflation.

The US Federal Reserve (Fed) on Wednesday raised its benchmark interest rate by 0.5 percentage points to a target rate range of between 0.75% and 1%. The hike was the largest since 2000 and followed a 0.25 percentage point increase in March, the first increase since December 2018.

UOB Global Economics and Markets Research senior economist Julia Goh said in view of expected improvement in economic conditions and upward price pressures, she thinks BNM is on the cusp of raising the overnight policy rate (OPR).

“With real gross domestic product (GDP) growth outlook of 5.3% to 6.3% (versus potential output growth of 3% to 4% in 2022), the negative output gap is expected to narrow further. This serves as a signal for potential rate hikes,” she told The Edge.

Also, she noted a less neutral to hawkish tilt as BNM highlighted in March that the “degree of monetary accommodativeness should be consistent with the improving economic recovery” and that “potential policy adjustments would be gradual and measured”.

“BNM has also cautioned that keeping interest rates low for a prolonged period could lead to emergence of financial imbalances with excessive risk-taking and unhealthy build-up of leverage,” she added.  

She projects the OPR to be raised by 25 basis points (bps) to 2% on May 11, followed by another 25 bps hike in the third quarter of 2022 (3Q2022) that will bring the OPR to 2.25% by end-2022.

Professor of economics at Sunway University Business School Dr Yeah Kim Leng also said with both growth momentum and inflationary pressures on the rise, it is likely that BNM will begin the interest rate normalisation process in the early part of the second half.

While raising interest rates may shore up the weakening ringgit, he said the decision will largely be based on ensuring a judicious balance between growth and inflation, while minimizing financial stability risks.

“It is well known that high household indebtedness may be destabilising to the economy in the event of an interest rate shock. However, a well telegraphed and gradual rise will not be too disruptive but conversely, it would be beneficial in reducing any build-up of inflation and debt risks,” he said.

OCBC economist Wellian Wiranto, on the other hand, is of the view that BNM will indeed be hiking rates in the second half, potentially as soon as July but only rather mildly at 25 basis points.

“While the spectre of rising Fed funds rates is something that all emerging market central banks, including BNM, have to countenance, the direct effect on Malaysia is more muted, relatively speaking. This is because Malaysia’s current account surplus status means that, as a whole, it is less beholden to the ebbs and flows of global yields and investor sentiment,” he told theedgemarkets.com.

According to the Ministry of International Trade and Industry, Malaysia’s trade surplus in March rose 10.3% year on year to RM26.7 billion.

On the domestic front, Wiranto said inflation has stayed broadly tame as well.

“Even though prices are indeed rising — especially for some food items such as chicken — and will be keenly felt by consumers, the broader picture is that the continued subsidies on fuel will put a cap on the degree of price increases. The effects of ringgit depreciation on imported inflation will be there too, but BNM is unlikely to react with rate hikes purely on this basis alone,” he added.

Moody’s Analytics assistant director Denise Cheok also said that he still expects BNM to raise rates in the third quarter of the year by 25 basis points.

“Inflation in Malaysia remains relatively moderate compared to the rest of the region, and the central bank will likely prioritise the economy’s return to pre-pandemic levels over capital outflows and currency depreciation,” he told The Edge.

However, he noted most of the price increase comes from food and fuel, which are basic necessities and therefore impact consumers the most.

According to him, Malaysia has one of the highest household debts to GDP ratios in the region, even before the Covid-19 pandemic, and a low interest rate environment will prevent debt service from becoming a systemic concern and eating into consumer spending.

Inflation risks seen to increase

Meanwhile, Goh noted that Malaysia’s inflation risks are still tilted to the upside, going by a recovering economy, prolonged supply chain bottlenecks, elevated commodity prices, and a higher national minimum wage.

The lapse of base effects particularly in electricity rates in 3Q22 and review of the government’s fuel subsidy mechanism are also sources of upside risks to the inflation outlook this year, she added.

She reiterated Malaysia’s 2022 full-year inflation projection at 3% (BNM est: 2.2%-3.2%, 2021: 2.5%).

Yeah also said there are signs of rising inflation pressures as shown in the double digit monthly increases in producer prices, as well as imported inflation contributed in part by the weaker ringgit.

“Thus far, the slack in the economy and above trend unemployment rate have lessened the potential of strong demand feeding the cost-push inflationary pressures. Nonetheless, the minimum wage hike with effect from May 1 could add to the rising cost pressures and pass-throughs to consumers in the coming months,” he said.

He also noted there is the risk that a low interest rate environment will cause domestic demand to strengthen too quickly and overshoot.

“Consequently, wage and price pressures would be reinforced, and inflation expectations could become unanchored. This will make it harder to keep headline inflation within the desired level of 2.2% to 3.2% projected by the central bank for this year,” he said.

Despite the pandemic-related disruptions to global supply chains and Ukraine war-triggered inflation shock to advanced economies, Malaysia’s inflation remains low as evident from the headline consumer inflation in March remaining unchanged at 2.2% from the previous month, while core inflation has edged up slightly to 2%.

Meanwhile, the ringgit stood at 4.3495 against the US dollar at the time of writing on Thursday, the lowest level since April 2017. Over the past one year, the currency has slipped 5.6% against the greenback.

Edited ByLiew Jia Teng
      Print
      Text Size
      Share