BANK Negara Malaysia (BNM) is anticipated to announce its decision to keep the overnight policy rate (OPR) at 3.00% during its upcoming meeting, according to analysts. The decision comes amidst ongoing deliberations regarding fuel subsidy rationalisation plans.
The central bank is set to issue its third monetary policy statement for the year, providing insights into the Monetary Policy Committee’s economic outlook and actions regarding the OPR.
CIMB Treasury and Markets research indicated that inflationary pressures might lean towards an increase due to diminishing base effects and the government’s commitment to subsidy reforms.
However, uncertainties regarding the implementation timeline and mechanism of subsidy rationalisation, particularly concerning diesel and RON95, have contributed to BNM’s wide inflation projection range of 2.0-3.5%. This uncertainty underscores the central bank’s data-dependent approach to monetary policy.
“As such, we expect BNM to extend its rate pause pending finer details on fuel subsidy rationalisation plans, keeping the OPR at three per cent on May 9, 2024,” stated the research unit.
Anticipated withdrawals from the soon-to-be-introduced EPF Account 3 and proposed civil servants’ salary hikes are expected to bolster private consumption. However, the actual impact may be tempered by higher inflation projected in the latter half of 2024, which could mitigate demand-pull inflation.
“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 renewed-emerging 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 3%.”
The impact of these economic stimuli on consumer spending is expected to vary. CIMB Treasury and Markets research highlighted that the impact of the EPF Flexible Account 3, effective May 11, and the proposed civil servants’ salary hike of more than 13%, 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.
Conversely, the impact may be diluted by higher inflationary environment in 2H24 from further subsidy rationalisation.
The spillover of civil servants’ salary hike to consumption is likely greater – to the tune of 25-30% – for those in lower grades or low-income group, who are likely to spend a higher portion of additional income earned.
CIMB Treasury and Markets research maintain their 2024 gross domestic product growth forecast for the country at 4.9%. – May 8, 2024
