BNM likely to raise OPR by 50 basis points in 1Q — Bank Islam

KUALA LUMPUR (Jan 18): Bank Islam Malaysia Bhd said persisting external economic headwinds and diminishing base effects would weigh on the domestic economy’s expansion this year.

“Growth headwinds abound in 2023, and the bank believes that Malaysia's real gross domestic product growth will moderate to 4.5%, steeper than others in the region," said Bank Islam chief economist Firdaous Rosli

"The World Bank's January 2023 forecast shares a similar view where Malaysia's growth is expected to rise at 4% in 2023 versus 7.8% in 2022,” he said in his economic outlook presentation to the media on Wednesday (Jan 18).

For 2022, Firdaous said Bank Islam is projecting Malaysia's GDP at 8.1%, higher than the official projections of between 6.5% and 7%, following the stronger-than-expected third quarter performance.

On inflation in the country, Bank Islam said it would moderate after peaking in 2022, amid favourable US dollar-ringgit exchange rates and base effects.

“The bank forecasts headline inflation to average 3% in 2023 (2022F: 3.4%) under the assumption that the government maintains the current fuel subsidy.

“However, inflation will inevitably trend higher than the bank’s baseline (3%) if the government proceeds with subsidy rationalization in 2023 as retail oil prices increase,” said Firdaos.

On the overnight policy rate (OPR), Firdaous expects Bank Negara Malaysia to continue to tighten the rate in the first quarter of this year, with a 25 basis point (bps) increase in its meeting on Thursday and another 25 bps in the March meeting, bringing the OPR to its new terminal rate of 3.25%.

“Keeping the OPR low for too long could pose a macroeconomic imbalance amid excessive risk-taking activities. The consecutive hikes in OPR, notwithstanding the impact on the overall borrowing cost to the Malaysian economy, were meant to gradually remove the excessive monetary accommodation rather than to tame inflation,” he said.

Firdaous said Bank Islam anticipated that the ringgit could trade at RM4.28 versus the US dollar by end of 2023 supported by resilient growth and the intensified China’s economic reopening.