Despite global headwinds, the Malaysian economy has been an outperformer in the region. After a punchy growth of 8.9% in the second quarter (2Q2022), the economy is likely to have impressed again in 3Q (10%). Thanks to the reopening of borders and withdrawal of pandemic-related restrictions, private consumption has rebounded to be a key pillar of growth. Consumer and business sentiment has been upbeat, and the labour market is recovering at a swift pace. The unemployment rate is now at the lowest level since the pandemic started. Investment growth has also been resilient, with record foreign direct investment inflows in 2021. Moreover, a well-diversified export base has helped Malaysia to reap the benefits of elevated commodity prices and a global semiconductor shortage. While there are now clear signs of a slowing trade cycle, the domestic tailwinds may still be enough to offset the impact at least through 2022.

The latest consumer price index (CPI) print showed signs of easing for both the headline CPI and food inflation. Yet, core inflation has still not budged. It rose by 4% year-on-year at the end of 3Q, a sharp contrast to a 1.6% growth in January. Though some commodity prices are easing globally, the second-round effects are still filtering through. Besides, the ongoing economic recovery and a tighter labour market may intensify these pressures further. Though with the dissolution of Parliament, the current Budget would need to be retabled, so there remains a possibility of subsidies being tapered in 2023. This may keep the headline CPI at elevated levels for longer, with a probable rise in wages and pensions potentially prolonging price pressures, too.

We expect Bank Negara Malaysia (BNM) to raise its policy rate by 25 basis points (bps) to 2.75% on Thursday (Nov 3). The upcoming meeting is the central bank's last meeting this year. After an expansionary Budget and the call for an early election, BNM's move will be in focus. We think rising core inflation warrants BNM to continue its hiking cycle (25 bps), albeit gradually. With this, BNM will have delivered a cumulative 100 bps in hikes this year, taking the overnight policy rate to 2.75%. That said, there may be a slight downside risk for BNM to take a small pause. Particularly since the headline CPI has eased slightly and global economic headwinds are also intensifying, the central bank may step back to assess the impact of the hikes (75 bps) it has already delivered. But will it be enough to put a lid on core inflation? The headline CPI may have peaked, but sustained and robust economic growth could intensify core inflation. We think it may still be early for BNM to take its foot off the pedal, with an expansionary Budget and the election on the cards.

Frederic Neumann
Chief Asia economist, co-head of global research for Asia
HSBC Bank plc
Nov 2, 2022