KUALA LUMPUR (Dec 9): Bank Negara Malaysia’s (BNM) interest rate upcycle has come to a close with the overnight policy rate (OPR) reaching a terminal rate of 2.75% in tandem with headline inflation already at its peak, according to Nomura.
“For Malaysia and Thailand, we have seen headline inflation already peaking," said Nomura chief Asean economist Euben Paracuelles, adding that the decline in headline inflation in the two countries will accelerate "in the months ahead".
"With that, there will also be a bit of a divergence in terms of monetary policy. We think BNM has already reached the end of its hiking cycle,” said Paracuelles during a conference call on Nomura's 2023 Asia economic, currencies and equity outlook.
"High household debt will become a constraint for further increases in interest rates, and we know both [BNM and the Bank of Thailand] are focused on mitigating financial stability risks as well," he said.
Meanwhile, the research house expects the US Federal Reserve (Fed) to maintain its hawkish stance on monetary policy, at least up until the first half of 2023 amid sticker inflation seen.
It forecast a cumulative 125-basis point (bps) hike in the Fed funds rate by-end May 2023 to 5.5%-5.75%, before easing in 2024 to 1.5%, compared with the 3.75%-4% range currently.
Its forecast aggressive 50 bps hikes thrice — in December 2022, as well as February and March 2023 — followed by a 25 bps hike in May.
"We don't expect the Fed to give forward guidance in 1Q2023 (the first quarter of 2023) that it is ready to cut rates despite the worsening recession," Nomura head of global macro research Rob Subbaraman said.
"The market may need to reassess the current narrative that bad economic news is good market news...and that could see a reprice of risk premiums," Subbaraman said.
"Ultimately, we think the central banks are going to break the backbone of sticky inflation. They are probably going to overtighten a bit in the process, and we think that is going to lead to significant [rate] cuts later in 2023 and well into 2024," he added.
Consequently, Nomura expects the strong US dollar environment to re-emerge in 1Q2023, before weakening in 2Q2023 when US inflation comes off and the market anticipates peak rate hikes by then.
For Malaysia, Paracuelles sees BNM’s Monetary Policy Committee (MPC) slashing the interest rate in late 2023 by an aggregate of 75 bps, translating into an end-2023 OPR of 2%.
The MPC has scheduled a total of six meetings next year between Jan 18 and Nov 2.
Against the US dollar, the ringgit has come up from its low of 4.7020 on Nov 10. It last traded at 4.4402 against the greenback at the time of writing, still down 6.2% since the start of the year, Bloomberg data showed.