Bimb Research Highlights

Economics - Malaysia Economy - BNM surprises with first OPR increase since July 2020

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Publish date: Thu, 12 May 2022, 04:44 PM
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Bimb Research Highlights
  • BNM raises OPR to 2.0% from 1.75%
  • BNM sees the economy on a firmer footing
  • BNM remains wary of downside risks to growth
  • Headline and core inflation is expected to trend higher
  • BNM signaled more tightening ahead

Bank Negara Malaysia (BNM) unexpectedly raised its benchmark interest rate from a historical low, amid signs that economic growth is on a firmer footing, driven by strengthening domestic demand and exports. BNM raised its overnight policy rate (OPR) by 25 basis points to 2.0% from the record low of 1.75%. Indeed, in its MPC statement, the central bank points out that “the unprecedented conditions arising from Covid-19 that necessitated historically low OPR have abated”.

Over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125bps to a historic low of 1.75% to provide support to the Malaysian economy from the impact of Covid-19 lockdowns. With the 25bps rate hike, Malaysia’s central bank just joined other central banks in tightening monetary policy to fight inflation pressures in the wake of the pandemic.

In its monetary policy statement, the central bank said that "With the domestic growth on a firmer footing, the Monetary Policy Committee decided to begin reducing the degree of monetary accommodation". The central bank said that the transition of Covid-19 into an endemic disease would strengthen economic activity as restrictions are eased and international borders are reopened. "Investment activity and prospects have also improved, underpinned by the realization of multi-year projects and positive growth outlook".

Bank Negara noted that the global growth outlook would continue to be affected by the developments surrounding the conflict in Ukraine, Covid-19, global supply chain conditions, commodity price shocks, and financial market volatility. Meanwhile, Bank Negara said for the Malaysian economy, the latest indicators show that growth is on a firmer footing, driven by In its monetary policy statement, the central bank said that "With the domestic growth on a firmer footing, the Monetary Policy Committee decided to begin reducing the degree of monetary accommodation". The central bank said that the transition of Covid-19 into an endemic disease would strengthen economic activity as restrictions are eased and international borders are reopened. "Investment activity and prospects have also improved, underpinned by the realization of multi-year projects and positive growth outlook". Bank Negara noted that the global growth outlook would continue to be affected by the developments surrounding the conflict in Ukraine, Covid-19, global supply chain conditions, commodity price shocks, and financial market volatility. Meanwhile, Bank Negara said for the Malaysian economy, the latest indicators show that growth is on a firmer footing, driven by

BNM signalled more tightening ahead

Bank Negara Malaysia raised its OPR by 25bps to 2.0%, in a move that surprised the market consensus and us. The timing was surprising but the reasons were good enough - a recovery from the pandemic has gained sufficient traction, high commodity prices are boosting export earnings and the inflation outlook is less benign. Bank Negara joins other central banks around the world in tightening monetary policy as the cost of everyday goods is pushed higher by supply chain problems and surging commodity prices.

We observed a change in the tone of the monetary policy statement as the central bank sounded more positive on the economic outlook despite elevated price pressures and lingering global risks. Given BNM’s positive growth outlook, the central bank mentioned for the first time in its monetary policy statement that “the MPC decided to begin reducing the degree of monetary accommodation” and it will be done in a “measured and gradual manner”.

Hence, we believed that BNM signalled more tightening ahead, but that the withdrawal of stimulus would be at a measured and gradual pace as long as its inflation outlook remains intact. We see BNM hiking once again in 3Q22 by 25 bps with a possibility of another rate hike in 4Q22 to bring the OPR to 2.50% by year-end if growth continues to be sustained and the underlying inflationary pressures remain considerable. On the other hand, if some of the downside risks to growth that has been pointed out by Bank Negara in its monetary policy statement unfortunately materialize, the central will prioritize supporting the economic recovery and leave rate unchanged in the last quarter, ending the year at 2.25% instead.

Source: BIMB Securities Research - 12 May 2022

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