KUALA LUMPUR (March 3): Bank Negara Malaysia (BNM) is expected to hike the overnight policy rate (OPR) by 25 basis points (bps) at the Monetary Policy Committee (MPC) meeting next Thursday (March 9), according to RHB Research.
In a note on Friday (March 3), RHB Research said the consensus view is predicated on three main catalysts.
“Core CPI (consumer price index) inflation is likely to remain elevated into 2Q2023 (second quarter of 2023), the nominal effective exchange rate (NEER) is on a steep trajectory down, the risks of an announcement of a reinstatement of GST (goods and services tax) in 2H2023 (second half of 2023) — with the timing of implementation unclear — and targeted fuel subsidy adjustment is up,” said RHB Research economist Chin Yee Sian.
He added the research outfit’s 2023 peak OPR forecast is maintained at 3.25%, with the balance of risks tilted towards a print of 3.5%.
“At a big picture level, real interest rates are too low in an environment where the momentum of the economy is strong and is likely to remain above trend for the better part of 2023. This is a cause for concern since it generates demand-side pressures and induces upside pressures on core CPI inflation,” Chin added.
RHB Research expects core CPI inflation momentum to remain elevated heading into 2Q2023 with robust domestic demand coupled with negative real interest rates will continue to fuel core inflation pressures.
“The demand-side pressures on core CPI inflation will likely remain intact in the next few months as our proprietary model suggests that consumer spending will remain resilient in 1H2023. We maintain our 2023 headline inflation projection at 3% y-o-y (year-on-year),” Chin added.
The balance of risk to inflation outlook is tilted to the upside, driven by any potential changes to blanket fuel and food subsidies mechanism, global commodity price developments and risks from supply-related disruptions.
Notably, the official 2023 inflation forecast range by the Ministry of Finance (MOF) is revised upwards to 2.8%-3.8% versus the previous projection of 2.3%-3.3%.
The economist further said that with financial markets continuously revising up their expectations of the US Federal Reserve (Fed)’s peak Federal Funds Rate (FFR), pressure on Malaysia’s NEER — which has been on a steep decline recently — to fall further is likely.
“This will be an important consideration at BNM’s March 9 MPC meeting,” he said.
Additionally, the economist said the ringgit is likely to be under pressure amid falling interest rate differential between Malaysia and the US.
“By looking at a broader view and comparing ringgit against other currencies, the NEER has trended lower recently. This implies that ringgit’s performance is relatively weak against other currencies as well,” Chin stated.
However, he said despite the supporting evidence for a 25bps OPR hike on March 9, BNM may adopt a wait-and-see approach for the upcoming MPC meeting.
“The policy rate hike might be on hold for the MPC to assess the impact of the cumulative past OPR adjustments, given the lag effects of monetary policy on the economy,” the economist said.
According to BNM, it usually takes about one year for monetary policy to have the most effect on the economy as it takes time for households and businesses to change their behaviours.
Based on the previous MPC statement, BNM remained cautious on the global economic outlook. The global landscape remains challenging with issues ranging from slower economic growth to unresolved geopolitical tensions, which would potentially lead to downside risks to Malaysia’s economy, said RHB Research.