Friday 29 Mar 2024
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KUALA LUMPUR (July 8): Fitch Solutions Country Risk and Industry Research expects Bank Negara Malaysia to raise its policy rate further by 50 basis points (bps) to 2.75% by end-2022, after it hiked by 25bps to 2.25% at its July 6 meeting.

In a report on Thursday (July 7), the firm said although inflation has remained relatively benign in Malaysia due to the government intervention, the ringgit has been under persistent downward pressure which will add to pressures for the central bank to normalise its accommodative monetary stance.

It said the economy remains on track to post a strong recovery, which should provide the central bank with sufficient room to normalise its monetary policy.

“At its meeting on July 6, Bank Negara Malaysia (BNM) hiked its benchmark overnight policy rate by 25bps to 2.25%, in line with the Bloomberg consensus and our expectations.

“Following the back-to-back rate hikes amounting to 50bps cumulatively, we have raised our forecast for Malaysia’s policy rate to reach 2.75% by end-2022, which would entail an additional 50bps worth of hikes over 2H22,” it said.

Fitch Solutions said although headline inflation has remained relatively benign in Malaysia, this is mainly a result of government intervention.

Meanwhile, it said the ringgit has continued to face downward pressure in the face of an increasingly hawkish US Federal Reserve, which should prompt BNM to hike interest rates further in order to safeguard ringgit stability.

“Furthermore, we believe that Malaysia’s economic recovery remains on track, which will provide sufficient policy room for the central bank to tighten policy further,” it said .

Fitch Solutions said thanks to the blanket fuel subsidy and price controls on items included in the inflation basket, Malaysia's inflation has been kept in check so far this year, averaging at just 2.4% in the first five months of the year.

“Nevertheless, we note that inflation in Malaysia has been on an uptrend since March 2022, with the latest inflation print in May rising to 2.8% y-o-y, from 2.4% in April.

“Over the coming months, we expect inflation to continue accelerating due to elevated commodity prices and a pickup in domestic demand, informing our forecast for inflation to average 2.8% for the whole of 2022, which is within BNM’s 2.2-3.2% forecast range for the year,” it said.

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