● Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) expectedly raised the overnight policy rate (OPR) for the third straight time by 25 basis points (bps) to 2.50%

- Out of the total 19 respondents of Bloomberg’s consensus survey only one called for a 50 bps hike.

- The ceiling and floor rates of the OPR corridor have been increased to 2.75% and 2.25%, respectively.

● Policy statement: Appear to raise more concern on global growth outlook and its spillover effect on the domestic economy.

- Global: Expects global growth to face challenges on impact of monetary policy tightening, China’s zero-COVID policy, and a potential energy crisis in Europe.

- Domestic economy: While the MPC tries to avoid mentioning the “R” word, it reiterated that “downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions.”

- Inflation: No change in its inflation outlook (2.2%-3.2%) and core inflation (2.0% - 3.0%) for this year. BNM continues to ensure that inflation is manageable and “partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.” Nevertheless, we believe that inflationary concern would be the main reason for BNM to raise the interest rate further. Following the reopening of the economy and removal of COVID-19 restrictions on April 1, there are signs that underlying price pressures are increasing, especially with core inflation rising to 3.4% in July (June: 3.0%), the highest rate since March 2016.

● BNM OPR outlook: Inflationary factor likely to prompt another rate hike at the last MPC meeting for the year

- Overall, it appears that BNM would likely stick to its hawkish stance and to realign with the global policy rate trend to combat inflation. This would mean BNM would continue to raise the OPR by another 25 bps at its next and final MPC meeting for the year (Nov 2-3), bringing it to 2.75%. Higher inflation and sustained recovery in domestic demand would continue to influence and back its policy decision.

- We forecast 3Q22 GDP growth to remain elevated at 8.8%, but slightly lower than the 8.9% recorded in 2Q22. Nonetheless, it is projected to sharply slow to 0.5% in the 4Q22, on the back of softening global demand due to the continued COVID-19 lockdowns in China, and prospect of a recession in the Euro area and the US. On that basis, we think that BNM may start to apply the brakes on its rate tightening cycle. Hence, we now assign only a 50-50 probability for another 25 bps rate hike in January next year.

- Meanwhile, the MPC stressed that it “is not on any pre-set course,” suggesting a clearer message to manage public and market expectations by removing any undue speculation of the direction of the monetary policy. BNM then reiterated that “monetary policy settings going forward would be done in a measured and gradual manner.”

Source: Kenanga Research - 9 Sept 2022