BANK Negara Malaysia (BNM) is now expected to hike its overnight policy rate (OPR) by 50 basis points (bps) to 2.25% in 2022 compared to a hold it throughout previously in order to rebuild policy buffers.
In stating its stance, Fitch Solutions Country Risk & Industry Research said it had been highlighting upside risks to its previous hold view from the need to keep up with major central banks which had been signaling a hawkish turn – including the US Federal Reserves and this has played out – with the Fed now likely to hike earlier in 2022 rather than in 2023.
During its final Monetary Policy Committee (MPC) meeting this year (Nov 2-3), BNM has kept the OPR at record-low 1.75% for the eighth consecutive meeting or since July 2020.
“We at Fitch Solutions now expect BNM to hike its OPR to 2.25% in 2022 as the central bank seeks to protect the value of the ringgit and maintain its interest rate advantage over especially the US which is now likely to begin hiking in 2022 rather than in 2023,” the research house pointed out in a commentary.
“Meanwhile inflation is likely to pick up in 2022 and while BNM does not have a numeric inflation target, it is still mandated to maintain price stability and a hike would be timely to stave off higher inflation which would threaten the recovery in private consumption.”
Despite the upward revision, Fitch Solutions continued to see some upside risks if major central banks around the world were to tighten monetary policy even quicker than expected due to growing underlying inflationary pressures.
“Furthermore, inflationary pressures are likely to pick up in 2022 as the economy continues to accelerate and while the BNM does not have a numeric target for inflation, it is still mandated to maintain price stability,” justified the research house which is independent of Fitch Ratings.
The Government now expects growth to range between 5.5% and 6.5% in 2022 against Fitch Solutions’ own forecast of 5.5% growth with the stronger growth picture to allow the central bank space to hike in order to head off inflationary pressures and rebuild policy space.
“There are both upside and downside risks to our forecast. On the upside, we note that Malaysia had seen 125bps of interest rate cuts in 2020 in order to support the economy and that the central bank could in fact accelerate the pace of hikes in 2021 in order to rebuild policy buffers in anticipation of future hikes,” opined the research house.
“This contingency becomes more likely if major central banks accelerate their tightening, perhaps in response to a swifter increase in inflation than they currently anticipate.”
Indeed, in 2010, BNM hiked OPR by 75bps after cutting by 125bps in 2009 to counter the impact of the Global Financial Crisis (GFC).
“We have adopted 50bps in hikes as our base case due to the more uncertain economic picture Malaysia faces compared to 2010 but if the economy and inflation were to perform better, then BNM may hike by a further 25bps like they did in 2010,” reckoned Fitch Solutions.
On the downside, there remains the possibility of another negative shock to the economy from perhaps the emergence of another variant of concern that causes greater strain on the healthcare sector despite the high vaccination rates.
“Or perhaps a sharper slowdown in China than we currently expect due to the playing out of risks around financial stability in the real estate sector,” added Fitch Solutions. – Nov 4, 2021
