THE Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has gone against the consensus of economists with its decision to raise the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3%.
Following this, the ceiling and floor rates of the OPR corridor are correspondingly increased to 3.25% and 2.75% respectively.
“The global economy continues to be weighed down by elevated cost pressures and higher interest rates,” justified the central bank. “Headline inflation continued to moderate but core inflation has persisted above historical averages. For most central banks, the monetary policy stance is likely to remain tight.”
For the record, most economists surveyed by Bloomberg have expected BNM to maintain its overnight policy rate (OPR) at 2.75% which has been unchanged since November last year at its monetary policy committee (MPC) meeting today.
Only two out of 18 economists expect a hike to 3%, one of whom predicting a 3% rate, followed by no change for the rest of the year, citing inflationary pressures, domestic growth, and financial stability.
Another economist expects OPR to peak at 3.25% with the balance of risks tilted towards 3% due to policy normalisation delays and possible subsidy rationalisation.
Moving forward, BNM expects the growth outlook to remain “subject to downside risks, mainly from an escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and a sharp tightening in financial market conditions including from further stress in the banking sector”.
“For the Malaysian economy, latest developments point towards further expansion in economic activity in 1Q 2023 after the strong performance in 2022,” projected the central bank. “While exports are expected to moderate, growth in 2023 will be driven by domestic demand.”
Meanwhile, household spending is expected to remain resilient, underpinned by better labour market conditions as unemployment continues to decline to pre-pandemic levels.
“The pick-up in tourist arrivals is expected to lift tourism-related activities. Further progress of multi-year infrastructure projects will support investment activity,” noted BNM. “Domestic financial conditions also remain conducive to financial intermediation with no signs of excessive tightening affecting consumption and investment activities.”
The central bank further expects risks to the domestic growth outlook to be relatively balanced.
“Upside risks mainly emanate from domestic factors such as stronger-than-expected tourism activity and implementation of projects including those from the re-tabled Budget 2023, while downside risks stem from weaker-than-expected global growth and more volatile global financial market conditions,” said BNM.
Elaborating further, BNM said headline inflation as expected, trended lower in recent months on account of moderating cost factors. Both headline and core inflation are expected to moderate over the course of 2023 by averaging between 2.8% and 3.8%.
“However, core inflation will remain at elevated levels amid firm demand conditions. Existing price controls and fuel subsidies will continue to partly contain the extent of upward pressures to inflation,” projected the central bank.
“The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy including on subsidies and price controls, financial market developments, as well as global commodity prices.”
Against the backdrop of the domestic growth prospects remaining resilient, BNM said the MPC is of the opinion that it is timely to further normalise the degree of monetary accommodation. As such, it has decided to withdraw the monetary stimulus intended to address the COVID-19 crisis in promoting economic recovery.
“In light of the continued strength of the Malaysian economy, the MPC also recognises the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances,” explained the central bank. “At the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy.”
It added: “The MPC will continue to ensure that the monetary policy stance remains consistent with the outlook of domestic inflation and growth.” – May 3, 2023
Main pic credit: Bloomberg
