Slow and Steady, BNM!

Bank Negara Malaysia (BNM) has continued with its monetary policy normalisation with a third 25 basis point (bps) hike, to bring the Overnight Policy Rate (OPR) to 2.75%. The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.00% and 2.50% respectively.

This is in tandem with the forecast of most economists. Further expectations are for another 0.25% increase in January 2023 and another 0.25% increase in March 2023, bringing OPR to 3.25%.

Inflationary pressures have been persistent with strong demand, tight labour markets, and elevated commodity prices. Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures.

Going forward, BNM expects the global growth outlook to continue to face headwinds from tighter financial conditions amid elevated inflation in major economies and the domestic challenges in China. The growth outlook remains subject to downside risks, including escalation of geopolitical tensions, worsening of domestic headwinds in China and potential energy rationing in Europe.

Household spending will continue to be underpinned by improvements in labour market conditions and income prospects. Tourist arrivals have increased following the re-opening of international borders is expected to further lift tourism-related sectors. Investment activity and prospects will be supported by the realisation of multi-year projects.

Downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies, further escalation of geopolitical conflicts, and worsening supply chain disruptions, according to BNM.

In line with earlier assessments, headline inflation is likely to have peaked in 3Q 2022 and is expected to moderate thereafter, albeit still elevated. Underlying inflation – as measured by core inflation – is projected to average closer to the upper end of the 2.0%-3.0% forecast range in 2022, having averaged 2.7% year-to-date given some demand-driven price pressures amid the high-cost environment.

Moving into 2023, headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as any changes to domestic policy measures. The extent of upward pressures to inflation will remain partly contained by existing price controls, subsidies, and the remaining spare capacity in the economy.

BNM believes its monetary policy is supportive of economic growth. Sounds like Turkey? Erdogan believes in growth with a low interest environment amidst hyperinflation. Nothing gets solved and the Turkish lira gets battered. Are we trying to follow them? Slow and steady is supposed to win but when you are too slow you will never make it!

Reference:

Another 25 basis points hike in Bank Negara’s OPR as expected, Cheah Chor Sooi, Focus Malaysia, 3 November 2022