BANK Negara Malaysia (BNM) has continued with its monetary policy normalisation with a third 25 basis point (bps) hike in a row 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 who have expected the OPR to reach 2.75% in November 2022, January 2023 (3.0%) and March 2023 (3.25%).
“The global economy continues to be weighed down by rising cost pressures, tighter global financial conditions and strict containment measures in China,” the central bank pointed out in a statement following the decision to raise interest rates by its Monetary Policy Committee (MPC).
“These factors more than offset the support from positive labour market conditions, and the full reopening of most economies and international borders.”
Moreover, inflationary pressures were more persistent than expected due to strong demand, tight labour markets, and elevated commodity prices despite improvements in global supply chain conditions, according to BNM.
Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures.
Downside risks exist
“In particular, continued aggressive adjustments in US interest rates and expectations of a higher terminal rate in the US have contributed to a persistently strong US dollar environment,” observed BNM. “This has resulted in higher volatility in financial markets, affecting other major and emerging market currencies, including the ringgit.”
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.
“For the Malaysian economy, latest indicators show that economic activity strengthened further in 3Q 2022, driven primarily by robust domestic demand,” noted the central bank. “Going forward, despite the challenging global environment, domestic demand will remain the key driver of growth.”
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.
“Nevertheless, external demand is expected to moderate following softening global growth,” opined BNM.
“Despite bouts of heightened volatility in the global financial and foreign exchange markets, these developments are not expected to derail Malaysia’s growth. Domestic liquidity remains sufficient with continued orderly functioning of the financial and foreign exchange markets.”
Inflation has peaked
However, financial institutions also continue to operate with strong capital and liquidity buffers. These will ensure financial intermediation remains supportive of the economy.
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.
In line with earlier assessments, headline inflation is likely to have peaked in 3Q 2022 and is expected to moderate thereafter, albeit remaining 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.
“The balance of risk to the inflation outlook in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions,” justified BNM.
“Against the backdrop of continued positive growth prospects for the Malaysian economy, the MPC decided to further adjust the degree of monetary accommodation.”
Such measure would pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth.
“At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth,” added BNM. – Nov 3, 2022
