BNM adopts cautious stance in face of subsidy uncertainties

BANK Negara Malaysia (BNM) has opted for a cautious “wait-and-see” approach, maintaining the Overnight Policy Rate (OPR) at 3% for the fourth consecutive time in its first monetary policy committee (MPC) meeting of the year.

This decision aligns with the expectations of financial analysts, including CGS-CIMB Research. The discussions during the MPC meeting underscored the uncertainties surrounding impending changes in taxes and subsidies, raising concerns about their potential impact on the economy.

“Thus far, there are indications that consumption will likely be negatively affected on an aggregate basis,” said CGS-CIMB.

Despite the concerns, CGS-CIMB identified certain favourable aspects such as financial assistance and recoveries in external elements like the electrical and electronics (E&E) sector, which could serve as mitigating factors.

“On balance, however, we think it is still unclear whether the negative and positive factors could neutralise each other, making BNM’s policy response uncertain.

“Given this scenario, we think BNM would likely employ a ‘wait-and-see’ stance, rather than its usual preemptive approach. BNM may wait for government announcements and assess their impact on the economy before deciding on a policy reaction, if needed,” it added.

The research firm also noted that any response from BNM might realistically occur only in the latter part of 2024 (2H24), following the implementation of significant tax and price adjustments.

“Regardless, our baseline assumption is that any adjustments will likely be somewhat neutral on the economy, and thus we maintain our view that the OPR will be kept at 3% in this year’s forecast (2024F).”

Moreover, BNM maintained a conservative stance on inflation for 2024. The central bank acknowledged stable cost and demand conditions but expressed caution, noting that the government’s assessment of price controls and subsidies could impact demand conditions.

“Anticipating potential price shocks due to subsidy cuts and new taxes, we reassert our position that inflation is expected to gradually rise to 3.2% year-on-year in 2024, compared to 2.5% in 2023,” CGS-CIMB further added. – Jan 26, 2023


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