As expected, Bank Negara Malaysia’s Monetary Policy Committee hiked the overnight policy rate for the fourth straight time by 25 basis points to 2.75%
Out of the total 24 respondents of Bloomberg’s consensus survey, only two called for no change. − The ceiling and floor rates of the OPR corridor have been increased to 3.00% and 2.50%, respectively. In its policy statement, the MPC raised similar concerns on the global growth outlook and its adverse impact on the domestic economy Global: The MPC expects “rising cost pressures, tighter global financial conditions, and strict containment measures in China,” to “more than offset the support from positive labour market conditions, and the full reopening of most economies and international borders.”
On the domestic economy, the MPC said “despite the challenging global environment, domestic demand will remain the key driver of growth,” adding that economic activity strengthened further in 3Q22. In this aspect, Kenanga projects the economy to strengthen to 10.9% (2Q22: 8.9%) in the third quarter. Downside risks to the domestic economy along with geopolitical conflict are expected to have an impact on a growth trajectory, which is projected to moderate sharply to 2.3% in the 4Q22.
The slowdown would be more pronounced in 2023 with growth projected to slow to 4.0-4.5% (KIBB 2022F: 6.5-7.0%). On Inflation, BNM sees headline inflation peaked in 3Q22 and may moderate thereafter but to remain relatively elevated. Meanwhile, it expects core inflation to hit the upper range of its forecast (2.0%-3.0%) for this year. BNM also reckons that the balance of risk to inflation in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies, as well as global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions.
BNM’s OPR outlook: Balance of risk to the growth outlook to gradually reduce BNM’s hawkish leaning With softening global demand, due to the continued COVID-19 lockdowns in China, and the prospect of a recession in the Euro area and the US next year, Kenanga believes that BNM may start to apply the brakes on its rate tightening cycle.
The uncertainty over the outcome of the 15th General Election and the ensuing rise of political and policy risk premium would further dampen the growth outlook and investment sentiment. The research house continues to expect the odds for another 25 bps rate hike in January next year to be even. Thereafter BNM may pause and possibly reverse ts tightening policy in the later part of the 2H23
