This article first appeared in The Edge Malaysia Weekly on February 28, 2022 - March 6, 2022

DESPITE Russia’s military offensive on Ukraine and its impact on energy prices, Bank Negara Malaysia is still expected to be the next central bank in Asean to raise interest rates — positive news for savers eyeing better fixed deposit (FD) rates.

Bank Negara Malaysia and the Central Bank of the Philippines “will hike rates first in 2Q2022 (but closer to the tip end), followed by the Bank of Thailand (BoT) and Bank Indonesia (BI)”, UOB Bank Malaysia senior economists and three others told clients in a note dated Feb 23, expecting a one-off 25 basis point hike by the BoT in 3Q2022 and a series of rate hikes totalling 100bps by BI in 2H2022.

With Malaysia only getting ready to reopen borders to international travel and economic recovery still nascent, at best, it is no surprise that all 23 economists polled by Bloomberg unanimously reckon that the Overnight Policy Rate (OPR) will be kept at its record low of 1.75% for at least one more time, following the conclusion of the Monetary Policy Committee (MPC) meeting this Thursday (March 3).

When contacted, UOB’s Julia Goh tells The Edge that she continues to see two rate hikes by Bank Negara this year — a 25bps increase each in 2Q and 3Q — barring a worsening or protracted pandemic despite the country’s high vaccination rates and a delay in the reopening of borders.

“The build-up of domestic inflation pressures, together with sustaining growth momentum and more aggressive US Federal Reserve monetary policy tightening, would justify an interest rate hike by Bank Negara as early as 2Q2022, in our view. A sooner-than-expected rate increase will also help preserve some room between Malaysia’s OPR and the US Federal fund rate, and maintain exchange rate stability,” she had earlier written in a note dated Feb 24.

Expecting the OPR to reach 2.25% by year-end, if not as early as mid-August, Goh is among five of 23 economists polled by Bloomberg who reckon that the OPR will start moving higher in 2Q2022. MPC’s next meeting (after March 3) is scheduled on May 11, two days before the release of 1Q2022 GDP reading on May 13.

Bloomberg data shows a consensus for OPR at 2% by the third quarter, with at least five economists projecting 2.25% versus 12 saying 2% and only six who see the OPR staying at its current record low of 1.75%.

RHB Research group chief economist and head of market research Sailesh K Jha expects Bank Negara to provide clearer guidance on an OPR hike by June before raising the OPR by 25bps in 2H2022, followed by a 50bps increase in 2023, according to a note dated Feb 24. He believes the central bank will wait for more clarity on the escalation in Ukraine, the Fed’s policy, inflation, further improvements in labour market conditions as well as greater capacity utilisation as recovery momentum picks up.

Those who do not think an interest rate hike will happen until late 2022 include economists at Maybank Investment Bank Research. “With the macroeconomic policy focus on supporting growth this year after underwhelming recovery last year from the pandemic-triggered recession in 2020, we maintain our outlook of the OPR staying at current levels for much of this year before a 25bps hike in 4Q2022 (Nov 3) and a 50bps in 2023”, they wrote in a note dated Feb 24, adding that recovery is still nascent.

After May 11, MPC is scheduled to meet on July 6, Sept 8 and Nov 3 but is free to have unscheduled meetings if the situation warrants it. GDP reading for 2Q and 3Q is expected on Aug 12 and Nov 11 respectively.

In any case, FD rates offered by commercial banks to capture new deposits would be an indicator to watch. Some commercial banks in Malaysia are already offering higher rates for regular deposits from retail savers when the start of rate normalisation by the US Federal Reserve became more apparent.

A quick check on regular (non-unit-trust-linked) retail FD rates found some commercial banks offering 2.3% to 2.45% in annual interest, higher than the 1.85% to 2.1% that was more common last year. A local bank was even offering 2.8% a year for 24 months on e-deposits since the start of this year, according to a promotional e-brochure.

According to World Bank data, Malaysia’s average (nominal) deposit rates — which largely hovered near 3% between 2011 and 2019 — fell to 1.95% in 2020.

Between January and July 2020, the OPR has collectively been trimmed 125bps over four successive meetings to the current record low of 1.75% compared with 3% in November 2019.

In the past decade, Malaysia’s average nominal deposit rates were highest at 3.13% in 2015 and 3.14% in 2018, according to World Bank data. The OPR was 3.25% between Jan 25, 2018, and May 6, 2019, as well as between July 10, 2014, and July 12, 2016.

The normalisation of interest rates can make a significant difference to a retiree relying on his or her FD interest income, especially as inflationary pressures rise. Annual interest on a deposit of RM500,000 savings, for instance, would yield RM15,000 a year, or RM1,250 a month, at 3% a year, compared with only RM10,000 a year, or RM833 a month, at 2% a year.

Headline inflation averaged 2.5% in 2021 and is expected to average 2.3% this year, according to the mean forecast from a Bloomberg poll of 23 economists. That means real interest rates look poised to remain in the negative this year.

The Fed’s Federal Open Market Committee (FOMC) is still expected to decide only on the quantum and not whether it will raise rates when its rate-setters next meet on March 15 and 16, despite the situation in Ukraine, experts say. Inflation in the US had hit a 40-year high of 7.5% in January even before Brent crude oil prices surged above US$100 a barrel for the first time since 2014 on Feb 24, after Russian forces launched their attack.

Expectations are for a hike of 25bps to 50bps in March, and at least 25bp at its May and June meetings to collectively have rates about one percentage point higher than the current range of 0% to 25% (since March 2020, same as December 2008).

An aggressive US normalisation would be among factors weighed by rate-setters in Malaysia.

“The risk of portfolio reversal that could weigh on the ringgit is high, given that the coming US monetary normalisation is expected to be more aggressive over a shorter period of time compared with the last Fed tightening cycle, and given the Fed’s much larger balance sheet,” economists at UOB Bank told clients in the Feb 23 note, noting that Malaysia recorded a net foreign portfolio outflow of RM28.2 billion in 4Q2016 and RM31.7 billion in 1Q2017, during the Fed’s last quantitative tightening cycle from 2017 to 2019.

“Back then, foreign holdings of government bonds fell from 30.6% of total outstanding as at end-2016 to 24.7% in March 2017, or equivalent to RM34.3 billion of net selling that quarter. Flows returned in the subsequent quarter once risk sentiment stabilised. As such, a similar trend of selling pressure may reoccur in the coming months before flows return supported by Malaysia’s stable growth fundamentals, robust external position with surplus current account and foreign direct investments,” they wrote, noting that foreign holdings of government bonds stood at RM238.2 billion, or 25.5% of total bonds, as at January 2022. That the fact that 49% of foreign holders of government bonds are pension funds and central banks provides some confidence that the majority are long-term holders and thus deemed less speculative in nature, they added.

Health Minister Khairy Jamaluddin said last Thursday (Feb 24) that the cabinet had finalised the date for the reopening of the country’s borders, even as he announced the relaxation of quarantine rules from March 1 for Covid-19 close contacts who have completed booster shots.

Expectations are for borders to reopen to foreign travellers by end-March to build on the momentum for recovery. Prime Minister Datuk Seri Ismail Sabri Yaakob, who is on a working visit to Cambodia and Thailand from Feb 23 to 26, is set to announce the date for borders to reopen but had yet to do so at the time of writing.

In detailing their reason for projecting a slower normalisation of OPR, economists at Maybank had cited MPC’s Jan 20 statement that there was still a slack in the economy that limits demand-pull and wage-driven inflation, a sub-optimal job market and wage recovery as well as the underwhelming economic recovery last year. Malaysia’s GDP growth was 3.1% in 2021, at the lower end of the revised forecast of between 3% and 4% (from 6% to 7.5% at the start of the year).

Market confidence should grow once it becomes apparent that Malaysia can achieve its GDP forecast of 5.5% to 6.5% this year, observers say. MPC’s statement on March 3 as well as guidance provided by Bank Negara on the economy when releasing its 2021 annual report on March 30 will be closely followed.

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