While we have fully factored in a 25bps hike in July, we were expecting BNM to adopt a more aggressive stance, similar to other central banks, and hike rate by 50bps in a move to cool inflation and help support the weakening ringgit not just against the USD but also on cross rates. However, BNM has decided to increase the OPR by 25bps to 2.25%.
While there are concerns over the rising interest rates will increase the borrowing cost for both businesses and household, it is important to weigh the cost and benefits between raising rates and weakening ringgit.
Under current circumstances, the weakening ringgit is due to the stronger dollar which is benefiting from the aggressive rate hike by the Fed. With BNM raising the OPR by only 25bps, the ringgit weakened to 4.42 against the USD.
The weakening trend of the ringgit will have a strong impact on imported inflation. This would result in transfer pricing to consumers as cost of living will rise. And there is a high risk for some under the M40 group to fall into B40 and more of the B40 sliding further.
With the rising interest rate differential following a more passive rate hike, the ringgit’s weakening trend will grow. Our reserves in BNM stands at US$112.8 billion or 4.6 months retained imports from US$116.2 billion or 5.3 months retained imports in January 2022. And the question is how much reserves will we be able to utilise to support the ringgit with more passive rate hikes.
Besides, there is a strong mismatch between supply and demand. Apart from the impact of supply disruptions, household spending has gain momentum, especially with the opening of the borders, improving job market and wages. This mismatch is a global phenomenon and not just Malaysia. While other central banks have embarked on a more aggressive rate hike path, we have decided to be less aggressive in this policy meeting, taking a more cautious view. And this may add pressure to the mismatch.
Without subsidies, inflation should be around 11% as opposed to 2.8%. And the subsidy is costing the government over RM71 billion. The weakening ringgit will add more to the import bills.
Following the latest decision, we continue to believe that BNM will further normalise its policy rate going forward. We gather that a 50bps hike one-off seems highly unlikely. We are of the view that
Source: AmInvest Research - 7 Jul 2022
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