OCBC: Malaysia’s Gingerly Hiked Pace Of 25bps Is Partly Due To Domestic Inflation Pressure

Bank Negara Malaysia raised its Overnight Policy Rate by 25bps to 2.25%, in line with market expectations said OCBC. This follows its inaugural hike in May, which marks the first back-to-back rate hike since early 2010.· 

Given the backdrop of the tighter monetary landscape globally, the hike should not be a surprise. Moreover, on the domestic front, even as the headline inflation remains relatively contained at 2.8% yoy, the recent uptick in the core inflation from 2.1% to 2.4% is a reminder of the potential for broadening price pressure that would capture the MPC’s attention, as well.

The fact that it has not gone more ‘ballistic’ with a 50bps hike today speaks to the heavy preference for a gingerly approach to tightening. That is a prudent thing given how the global recession fears are on the rise. Going forward, OCBC sees at least one more 25bps hike this year, which will be seen as a further normalization of the policy rate rather than outright tightening.

Slowly but surely

Going by MPC meeting, there were murmurs in the market about how Bank Negara might just join some of the more gung-ho members of the global central banking brethren by not only hiking its policy rate, but by doing so by a hefty 50bps. As it turned out, BNM has decided that a gingerly approach remains the best, opting to raise rates by a more traditional 25bps increment instead. To us, the move strikes the right balance between contending with the two biggest bugbears of the global economy at this point: inflation and recession risks.

Zooming in on the first factor to begin with, broadly speaking, inflation risks have stayed relatively contained in Malaysia. While the latest headline print of 2.8% yoy in May was indeed higher than the 2.7% that was expected, the pace of increase has been less concerning than in other countries.

To be sure, there are obvious areas that deserve a close watch. These include food prices that had accelerated to 5.2% yoy, driven by items such as chicken prices, which climbed 13.4% yoy. The fact that core inflation has gone up from 2.1% to 2.4% is a reminder of the potential for a broadening of price pressure beyond food and fuel categories, as well. Indeed, as BNM noted in its MPC statement today, the underlying inflation as measured by core prints, “is expected to average between 2.0%-3.0% in 2022 as demand continues to improve amid the high-cost environment”.

However, even as such price pressures need to be contained, it does not warrant an outsized move by BNM just yet, especially because, unlike some regional peers, it had already started hiking earlier this year.

Perhaps more tellingly, the decision to hike by 25bps rather than anything larger would have taken into account the rising spectre of a more pronounced global slowdown, as well. Already, even as it still spoke broadly of how “The reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity,” the MPC statement noted how “Going forward, the pace of global growth is expected to moderate, and will continue to be affected by the elevated cost pressures, conflict in Ukraine, global supply chain conditions, and financial market volatility.

Hence, even as it continues to project a strengthening economic recovery, things are likely to turn less rosy from here, with firming domestic demand countered by external demand which “is expected to moderate, weighed by headwinds to global growth.” The statement continued to point out the presence of the downside risks, which include “a weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions.

In gist, even as Bank Negara is keen to continue normalizing its policy rate away from the pandemic-era lows, partly because of the domestic inflation pressure, it does not see the need to adopt a more ‘ballistic’ 50bps move at this point, especially given the increasingly uncertain global growth outlook. In particular, we would highlight the portion of the MPC statement which spells out that “Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.

Going forward, OCBC sees at least one more 25bps hike from the central bank this year, with a high likelihood of it taking place in the next immediate meeting on September 8th. It might then pause in the last meeting of the year in November to assess the balance between inflation and recession risks before undertaking any action thereafter.

Wellian Wiranto – Economist Global Treasury – Research & Strategy

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