HAVING hiked up the overnight policy rate (OPR) as expected by 25 basis points (bps) to 2.75% on Nov 3, Bank Negara Malaysia (BNM) is likely to pursue further hikes going into 2023 with interest rates peaking at 3.25%.
This came after the US Federal Reserve hiked interest rates by 75bps a day earlier (Nov 2). The 25bps hike by BNM was the fourth straight increase of that magnitude since the central bank began its rate hiking cycle in May, taking the cumulative rate hikes to 100bps.
“Going into 2023, we maintain our view that BNM will raise interest rates by an additional 50bps to a peak of 3.25% in 2023,” projected Fitch Solutions Country Risk & Industry Research which is independent of Fitch Ratings’ credit ratings.
“However, risks are firmly weighted to the upside as major central banks around the world, particularly the US, remain quite hawkish which could prompt the BNM to hike interest rates more aggressively in order to safeguard ringgit stability.”
The research house now expects Malaysia’s headline inflation to moderate over the coming months to 3.7% by end-2022 (from 4.0% previously) to average 3.4% in 2022 (from 3.5% previously) before averaging about 3.1% in 2023.
The country’s headline inflation figure eased slightly to 4.5% year-on-year (yoy) in September from a 16-month high of 4.7% in August, peaking slightly earlier than Fitch Solutions previously expected.
“Despite the slight revisions to our inflation forecasts, the key takeaway is that price pressures will likely remain higher than the historical average of 1.5% (2016-2021) while real interest rates remain negative,” cautioned the research house.
“This suggests to us that there is more room for BNM to hike interest rates back to its pre-COVID levels of around 3.00%-3.25% to safeguard macroeconomic stability.”
It added: “Despite existing price controls and fuel subsidies, price pressures in Malaysia have picked up due to a recovery in domestic demand and elevated food prices, and we expect these dynamics to continue into 2023.” – Nov 7, 2022
