BNM increased again the Overnight Policy Rate (OPR), from 2.25% to 2.50%, in its fifth Monetary Policy Meeting of 2022, in line with market expectations. In the Monetary Policy Statement, BNM highlighted that the global economy remains on an expansion path despite a slower pace and improvement in Malaysia’s labour market conditions and domestic spending continues to support the recovery in local economic activity.
The central bank also highlighted global growth faces challenges from tightening monetary policy in many economies, elevated inflationary pressure and pandemic management measures in China. MIDF views the decision to raise OPR by another +25bps as timely with the steady expansion of the domestic economy as reflected in macroeconomic data and core inflation trends.
In terms of growth outlook, BNM foresees growth momentum is on a strong footing, driven by strengthening domestic demand and transition to endemicity and international borders reopening will lift tourism-related sectors. Further improvement in the labour market with a lower unemployment rate, higher labour participation rate and better income outlook has supported domestic demand. On the flip side, BNM points out that risks to growth remain on the radar particularly weaker-than-expected global growth, further escalation of geopolitical tension and deteriorating supply chain disruptions.
MIDF believes the current focus of BNM’s monetary policy setting is to ensure a sustainable recovery of Malaysia’s economy. With the rising core inflation trend and stronger-than-expected domestic demand, the investment firm expects further policy normalisation will likely be carried out in Nov-22 MPC meeting (the final meeting this year) with another +25bps hike.
However, the decision will be subjected to the stability of economic growth, the pace of price increases and a further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand. From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness