BNM Faces Growing Pressure To Increase Rates Faster

Nur Adilah Ramli

22nd June 2022 - 3 min read

UOB Global Economics and Market Research has said that Bank Negara Malaysia (BNM) is under growing pressure to increase the overnight policy rate (OPR) faster. This is due to the US Federal Reserve’s aggressive rate hikes, rising food and energy prices globally, as well as potential supply shocks that may further drive up prices and inflation.

“Rate hikes would then also need to be sharper and more abrupt in that scenario. There may also be a need to act faster now in order to have sufficient policy buffers in preparation for the next recession (when it happens),” said the economists involved in the research, Julia Goh, Enrico Tanuwidjaja and Jasrine Loke.

The economists further highlighted the need for BNM to act faster in light of the escalating global recession fears. This is driven by the aggressive tightening policy, ongoing Russia-Ukraine crisis, strict Covid-19 containment measures in China, as well as tighter global financial conditions.

“As such, we think BNM would need to weigh how these factors could affect domestic economic conditions while the fast narrowing rate gap with the US puts more pressure on capital flows and the ringgit,” the economists remarked, adding that a delayed policy response by the central bank may lead to excessive ringgit volatility in the second half of this year.

The economists also noted that more central banks have carried out consecutive or larger-than-expected rate hikes since May this year. They further commented that the long-term inflation outlook has compelled the respective central banks to front-load their rate hikes as a measure to control the projected inflation.

Additionally, the economists stated that there is room for BNM to raise the OPR by 50 basis points before the end of September this year. “Given the ongoing domestic recovery and latest developments, there is room for BNM to follow through with another 25 basis point rate hike at both the July and September meetings,” they explained.

“As we expect Malaysia’s growth momentum to remain robust this quarter and (the) next, we think that BNM may consider bringing forward rate hikes to keep a lid on inflation risks while growth remains decent,” the economists further said, adding that they projected the OPR to reach 2.5% by end-2022, and 3% by end-2023.

In addition, the economists commented that the country’s monetary policy will remain accommodative, even after the projected hikes of 75 basis points for this year. This is as the hikes only reverse part of the total 125 basis points slashed during the pandemic. For context, the OPR originally stood at 3.00%, before it was gradually reduced to its lowest point of 1.75% in July 2020. The OPR was eventually raised by 25 basis points to 2.00% in May 2022 on the back of the improving economy.

Finally, the economists shared that they expect the US Federal Reserve to further increase its interest rate to reach an upper end of 3.5% by end-2022, and 4.00% by the end of the first quarter of 2023. “Emerging markets’ central banks will start to follow suit, or risk falling behind in the rate gap with the US interest rate,” they remarked.

(Source: The Edge Markets)

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