Several economists now say that Bank Negara Malaysia (BNM) is likely to hold the overnight policy rate (OPR) at its current level for a longer period, and will push further hikes into the second half of 2023 (2H23) instead. This veers from previous expectations, where economists predicted more rate hikes in the first quarter or half of 2023.

Economist Paolo Casadio, who is also a professor at HELP University, said that a resumption of OPR hikes in the first half of 2023 (1H23) could negatively impact Malaysia’s economic growth, especially following its 2.6% contraction in the fourth quarter of 2022. Additionally, industrial activities are slowing down, along with a reduction in export – both situations spurring the need for a pause in OPR adjustments.

“The evolution suggests the need to monitor further the situation before deciding another move in the interest rates. The expectations of the market should incorporate this new scenario and expect a possible intervention by Bank Negara in the second half of the year,” Casadio commented, adding that he had been calling for the OPR to be retained at its current rate of 2.75% since November 2022 as it is already back to a “neutral” level.

Casadio also noted that various developments on the international level could lead to some changes to the Malaysian business cycle as well, and as such, necessitate a pause in the OPR to regroup and rethink business decisions. “The new path of the OPR contains an important signal to the market and the government about the additional prudence to consider in taking new business decisions,” he added.

Similarly, economist Manokaran Mottain also called for a longer pause in OPR hikes, although he believes that the OPR will likely reach 3.25% by the end of 2023. He said that a pause is needed at present because the nation is still struggling with an increased cost of living.

“In addition, appropriate actions to remedy cost of living are not coming as fast as we expected. So, under such a circumstance, a continued OPR hike would only add burden on the rakyat,” said the former chief economist of Alliance Bank.  

That said, Mottain also highlighted that BNM may eventually be compelled to raise the OPR as it still needs to maintain a certain spread between the OPR and the US Federal funds rate, without leaving a considerable gap. This is following the US Federal Reserve’s aggressive stance in tightening its monetary policy since last year.

Analyst at CGS-CIMB Research, Nazmi Idrus also agreed that BNM will continue to adopt a cautious position and take an extended pause to observe the economic impact of previous hikes, especially with the weakening of Malaysia’s domestic environment and softening in private consumption. However, like Mottain, he also expects the OPR to hit 3.25% by the end of 2023, with two rate hikes of 25 basis points (bps) scheduled in 2H23.

Malaysia’s OPR currently stands at 2.75%, which resulted from four hikes back in May, July, September, and November 2022. These consecutive increases led to widespread expectations that BNM will continue its rate hikes in early 2023, bringing the OPR back to its pre-pandemic level of 3% or more. BNM then went on to surprise the market by hitting the pause button in its first MPC meeting of the year in January 2023, stating that it needed time to assess the economic impact of previous decisions.

(Source: The Star)

• TAGS:
• Bank Negara Malaysia
• BNM
• Manokaran Mottain
• Nazmi Idrus
• OPR
• Overnight Policy Rate
• Paolo Casadio