UOB: Limited impact of BNM’s currency tightening, current policy likely to hold

BANK Negara Malaysia (BNM) is likely to maintain its current policy stance for an extended period, according to Singapore-based United Overseas Bank (UOB). The central bank’s overnight policy rate (OPR) is expected to have peaked at 3.00%.

UOB’s analysis suggested that policymakers are content with the current monetary policy setting, which aligns with the nation’s inflation and growth prospects.

“It is also our base case view that BNM’s next move will more likely be towards easier monetary policy.

“However OPR cuts will probably only materialise with a lag after reductions in the US Fed Funds rate has been delivered,” UOB Malaysia macro team wrote in a report.

The primary arguments for tightening monetary policy are linked to supporting the ringgit. However, any minor adjustments are unlikely to significantly narrow the historically wide rate differentials between the ringgit and the US dollar.

Moreover, policymakers are cognisant of the difficulties in countering a strong US dollar, making adverse inflation outcomes the main trigger for any potential OPR increase.

“The MYR IRS (interest rate swap) forwards curve is currently priced in line with our ‘extended hold’ OPR view.

“Over the past months, investors’ expectations of the near-term rates path have hovered in the neutral zone with a small chance of rate hike,” added UOB.

“Considering the surprise April rate hike by Bank Indonesia, we think the optics will remain in favour of upside tail risk over the downside hedges in the short-term rates space.” – May 16, 2024

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