BNM May Hike Again Before A Pause: SC

Standard Chartered opines that the Central Bank may hike rates again before a pause, the global banking group now projects Bank Negara Malaysia to hike again in January by 25bps, followed by a pause in March, before a final 25bps hike in May. This would bring the terminal policy rate to 3.25%. Previously, it was expected a pause after November’s 25bps hike until a final 25bps hike in Q3-2023, with a terminal rate of 3.00%.

The economy has continued to recover strongly. Inflation has broadened further, albeit suppressed by subsidies. Wages are rising although there are no signs of a wage-price spiral. As a result, SC raised its terminal rate hike projection to 3.25% from 3.00% but keep a view that the central bank may stick to 25bps increments despite more aggressive rate hikes by major central banks. The May hike call is premised on potential subsidy changes in H2-2023, which may require another rate
hike especially if domestic demand remains strong.

The latest November monetary policy statement is supportive of a January rate hike call. BNM sees risks to the 2023 inflation outlook as tilted to the upside. In addition, the central bank kept its upbeat view on domestic demand, while noting that current monetary policy is accommodative and supportive of economic growth. These references suggest further tightening may be in order.

Having said that, BNM reiterated that the monetary policy committee is not on any pre-set path. Importantly, the central bank added a new nuance in November, suggesting that the latest 25bps hike may be pre-emptive in nature. On balance, the bank said it sees room for BNM to at least reverse COVID-induced rate cuts (the pre-COVID policy rate was 3%), before a pause.

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