BNM raised the OPR by 25bps to 2.00% in the May 2022 MPC meeting, earlier than our expectation. Sustained economic reopening on the global front has partly helped to cushion the impact of geopolitical tensions and strict Covid -19 restrictions in China. Domestically, BNM views the economy is on a stronger footing, supported by further easing of restrictions and better investment prospects. However, they note that risks to growth still remain, stemming from weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions. Given the improved economic prospects, the MPC has decided to begin reducing the degree of monetary accommodation in a measured and gradual manner. Following this development, we now expect BNM to raise OPR by another 50bps in 2H22, bringing OPR to 2.5% by end-2022.

DATA HIGHLIGHTS

BNM raised the OPR by 25bps to 2.00% in the May 2022 MPC meeting, earlier than our expectation. On the global front, the sustained economic reopening and improvement in labour market conditions have partly helped to cushion the impact of Russia-Ukraine geopolitical tensions and strict Covid-19 restrictions in China. However, they noted that the global growth outlook will be dependent on the developments surrounding the military conflict in Ukraine, global supply chain conditions and commodity price shocks. At the same time, rising inflationary pressures as a result of supply chain pressures and elevated commodity prices are expected to warrant quicker pace of monetary policy adjustments among central banks, which may also lead to increased financial market volatility. Consequently, USD/MYR weakened by 5.2% on a YTD basis, as foreigners reversed bond inflows following more hawkish stance from the Fed. International reserves declined by USD4.4bn during the period.

On the domestic front, the MPC views economic growth is on a stronger footing, supported by strengthening domestic demand in line with further easing of restrictions, reopening of international borders and higher participation in the labour market. Investment prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook. Following release of better-than-expected March economic data, we expect 1Q22 GDP to show continued recovery and post faster growth compared to previous quarter of 3.6% YoY. Nevertheless, risks to growth still remains, stemming from weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions.

On inflation, BNM has maintained its headline inflation projection of 2.2% to 3.2% in 2022. While the MPC foresees some upward pressure on prices given the improvement in economic activity and persistent cost pressures, this would be partly limited by the existing price controls and continued spare capacity in the economy. Recovery in the labour market has been rather gradual with the unemployment rate still standing at 4.1%, above the pre-pandemic level (3.3%).

HLIB’s VIEW

The MPC has decided to begin reducing the degree of monetary accommodation given that domestic growth is now on a firmer footing as Malaysia transitions to endemicity. They stated that the withdrawal of policy accommodativeness will be done in a measured and gradual manner, ensuring that monetary policy remains supportive of sustainable economic growth in an environment of price stability. Following this development, we now expect BNM to raise OPR by another 50bps in 2H22, bringing OPR to 2.5% by the end of the year.

Source: Hong Leong Investment Bank Research - 12 May 2022