Bank Negara Malaysia (BNM) is set to issue its third monetary policy statement on the overnight policy rate (OPR) decision later this afternoon.
The statement provides an update on BNM Monetary Policy Committee’s outlook for the economy and action on the OPR.
CIMB Treasury and Markets research said looking ahead, inflation looks to be tilted to the upside with fading high base effects and the government’s commitment to subsidy reforms.
The rate of incline however is clouded by uncertainties on implementation timeframe and/or mechanism − i.e. diesel and RON95 subsidy rationalisation approach have not been brought to the cabinet for discussion − which underpins BNM’s wide inflation projection range of 2.0-3.5 per cent and its data-dependent stance on monetary policy.
“The demand boost and administered price policy changes nonetheless maintain the hawkish skew for OPR – particularly in the context of the delayed Fed pivot and renewedemerging market currency volatility,” the firm said.
“Given a preference for intervention and resident inflows to address ringgit’s weakness, monetary policy is likely to remain status quo and we maintain our end-2024 OPR forecast of three per cent,” it added.
CIMB Treasury and Markets research said the sensitivity of private consumption is a declining function of income levels, reacting more strongly to permanent income changes than transitory ones.
Therefore, it sees a differentiated impact on consumer spending from the EPF Flexible Account 3 effective May 11, and the proposed civil servants’ salary hike of more than 13 per cent, in December 2024.
“We expect the spillover of the former to be milder and short-lived, given Account 2 balances are skewed towards members in higher income brackets with lower marginal propensity to consume,” it said.
A Bloomberg poll showed that all 24 economists it surveyed are expecting BNM to keep the OPR unchanged at 3% following March’s milder-than-expected inflation data – up 1.8% year-on-year – despite a two percentage point increase in the services tax.
“Inflation remained benign as of March, despite a 2 percentage points increase in the services tax, suggesting limited pass-through; this reflects subdued core inflation,” Standard Chartered Global Research said.
BNM’s monetary policy committee kept the OPR at 3% at its July 2023 meeting. The headline rate was last raised by 25 basis points in May 2023.
Looking ahead, there are some factors that may bring about a rate hike in late 2024, said Standard Chartered. Among these is the restructuring of Employees’ Provident Fund (EPF) accounts, potentially resulting in approximately RM 25 billion (about 1.3% of gross domestic product) in withdrawals, which could contribute to demand-driven inflation.
The anticipated increase of civil service salaries by over 13% from December onwards, along with the planned fuel subsidy rationalisation, could also increase the likelihood of a rate hike by BNM later in the year.
“We will watch for any tweaks to BNM’s inflation outlook to assess the risk of a hike in late 2024; however, this is not our base case at the moment,” it said.
Dr Mohd Afzanizam Abdul Rashid, Bank Muamalat Malaysia Bhd chief economist said there is a need for BNM to maintain its “present policy stance” in order to keep the risks of higher inflation at bay.
“We are of the opinion that BNM would want to maintain their prudent assessment of inflation, which likely leans towards the conservative side. In other words, keeping the OPR steady would ensure risk of higher inflation is well in check, he said.
