● Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) decided to raise the overnight policy rate (OPR) by 25 basis points (bps) to 2.25% as expected

- Based on the Bloomberg consensus of 19 respondents, only one expected status quo while the rest, including KIBB, made a call for a 25 bps hike.

- This is a second-consecutive rate hike for the year following a surprise hike in May.

- The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.50% and 2.00%, respectively.

● Policy statement: Growth momentum to continue but the MPC remained cautious amid elevated external risks

- Global: BNM expects the pace of global growth to moderate going forward and is largely affected by “elevated cost pressures, conflict in Ukraine, global supply chain conditions, and financial market volatility”.

- GDP: BNM sees domestic growth to be supported by “firm domestic demand” underpinned by the transition to endemicity. Nevertheless, headwinds in the external sector remain, as it flagged “weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions” as downside risks to growth.

- Inflation: BNM retains its outlook, with average core inflation between 2.0% - 3.0%, while headline inflation is projected between 2.2% and 3.2%, underpinned by “government price controls, fuel subsidies and the continued spare capacity in the economy”, which likely put inflation under control. In comparison, we have revised our inflation forecast earlier to 3.3% for 2022 and 4.2% in 2023 as we expect inflationary pressure to rise in the upcoming months amid rising food prices brought by the supply disruptions and upward revision on ceiling prices of controlled food items.

● BNM OPR outlook: Rate hikes to continue for the remainder of the year amid rising inflation

- We expect BNM will continue its monetary policy tightening further in the upcoming MPC meeting. This is largely due to the upward pressure on inflation amid rising food prices and a sustained recovery in domestic demand, as reflected in the latest high-frequency indicators such as unemployment rate, retail sales, and imports. This is also in tandem with the global central bank’s monetary policy tightening cycle predominantly to combat rising inflation.

- Nevertheless, it is unlikely that BNM would embark on an aggressive tightening cycle such as a 50 bps hike unless the inflation rate overshot its target range driven by stronger than expected domestic demand.

- Likewise, we retain our forecast that BNM will gradually raise the OPR by 25 bps each in September and November MPC meetings, with the final hike in 1Q23. Therefore, the policy rate is expected to settle at 2.75% by the end of this year and 3.00% for 2023.

Source: Kenanga Research - 7 Jul 2022