BMI, a Fitch Solutions company, said Bank Negara Malaysia (BNM) is expected to hold its overnight policy rate (OPR) at 3% until the end of 2024.
The central bank had on March 7 left its OPR on hold at 3% for the fifth consecutive meeting, in line with consensus and BMI’s expectations.
BMI said apart from the central bank’s oblique reference to an “undervalued” currency, which was notably absent from prior policy statements, little else changed, particularly for forward guidance.
BMI, in a statement, said there are two reasons supporting its view that BNM will keep rates on hold at its next meeting on May 9, 2024. Firstly, it said the current inflation trajectory does not pose a threat to the central bank’s inflation target.
“Wage growth in the services sector has been on a broad downward trajectory, having peaked at 9.5% year-on-year (y-o-y) in the second quarter (Q2) of 2022 and has most recently fallen to around 3% in Q4 2023.
“The data further implies that services inflation, which accounts for more than 50% of the basket, will stabilise around 2% over the coming quarters, in line with our view for headline inflation to average at 2% in 2024,” it said.
Secondly, it said the ringgit has come under considerable pressure, having depreciated by 5.1% against the US dollar in the past year.
“While it has made a gradual comeback in recent weeks, the ringgit’s year-to-date performance continues to lag other emerging market economies.
“We have been reiterating that the BNM will be wary of loosening monetary policy for fear of destabilising the currency as global monetary conditions remain tight,” it said, adding that BNM is aligned on this view and expects the global monetary policy stance ‘to remain tight’ in the short term.
Nevertheless, BMI added, with the US Federal Reserve likely to ease policy in June, yield differentials should gradually favour the ringgit over the coming months.
The research house said it viewed that not only BNM is prone to long periods of inaction but at 3%, the policy rate is in line with pre-pandemic levels, suggesting that policy is not as tight as it is in other economies.
Further, it forecasted underlying price pressures to ease across 2024 and for it to average 2% in 2024, down from 2.5% in 2023.
“Our oil and gas team forecasts a 5% increase in average crude oil prices in 2024, which is consistent with headline inflation falling well below 2%. This suggests that inflation should not pose any concern for BNM for the remainder of this year,” it said.
Seperately, BMI said it expected Malaysia’s growth to remain robust in 2024 with the latest national accounts data showed the economy contracting by a seasonally adjusted 2.1% quarter-on-quarter in Q4 2023, which corresponded to a 3% y-o-y growth rate.
BMI said while this brings the full-year growth in 2023 to 3.7%, it fell short of its forecast of 3.9%.
“Looking ahead, with the economic outlook improving, we expect growth to accelerate to 4.4% in 2024. We think the central bank would like to preserve policy space instead of acting in the event of a negative shock to the economy,” it said.
However, it said the risks to its interest rate forecasts are skewed to the upside.
“The domestic inflation outlook still depends in large part on government plans around subsidies this year. A pullback would result in a renewed increase in price pressure,” BMI said.
It said should the ringgit face further depreciatory pressures, it could prompt BNM to raise rates to maintain real interest rate differential vis-à-vis the US.
