KUALA LUMPUR: The solid expansion of Malaysia's economy in the second quarter (Q2) of 2022 has opened the door for more interest rate hikes, economists said.
OCBC Bank economist Wellian Wiranto said even before the upside beat in the Q2 gross development product (GDP) print, the bank already saw a good chance of a 25 basis points (bps) hike at Bank Negara Malaysia's Monetary Policy Committee (MPC) meeting in September, partly because of the incipient price pressures that were starting to show up more concretely.
"Even though there might now be some whispers of a 'fatter' hike of, say, 50bps, we continue to attach a low probability to that," he said in a note.
Wellian said the fact that Bank Negara had been relatively early in normalising rates – having hiked rates twice this year already – gave it the space to continue adopting a modest and gradual approach for now.
"Still, we do see a higher chance of another 25 bps hike in the last meeting of the year in November, which would put the Overnight Policy Rate (OPR) at 2.75 per cent by the end of 2022.
"There is still some time to come, with a number of key data points to look out for in the interim months.
"In particular, if core inflation picks up speed to above 3.5 per cent YoY by then, compared to the latest 3.0 per cent print of June, the likelihood of the November MPC hike will be a lot more crystallised," he said.
Meanwhile, UOB economists Julia Goh and Loke Siew Tin stated that Bank Negara had delivered a back-to-back interest rate hike for the first time since 2010, raising the OPR by 25bps in May followed by another 25bps in July to 2.25 per cent.
"We think the latest GDP print reaffirms Bank Negara's positive view on Malaysia's economy despite rising global headwinds," they said in a note.
Moreover, they said inflation pressures had risen amid elevated cost pressures due to the ongoing military conflict in Ukraine that affected energy and food supplies, adverse weather conditions, weaker ringgit and stronger demand due to improving labour market conditions.
"Bank Negara expects headline inflation to trend higher in coming months due in part to the base effect from the discount on electricity tariffs implemented in Q3 2021.
"However, upward inflation pressures are expected to be partly contained by existing price controls, fuel subsidies, and continued spare capacity in the economy," they said.
Goh and Loke do not expect Bank Negara to accelerate the quantum of rate hikes i.e. keep at 25bps, or conduct an unscheduled monetary policy decision.
They said one possibility was to continue the path of rate hikes during scheduled meetings in December and possibly January, provided growth conditions and supportive drivers hold-up.
"In the last monetary policy statement, Bank Negara reiterated a measured and gradual rate hike path going forward and its pledge to keep the OPR accommodative and supportive of growth.
"This is in line with gradual normalisation of monetary policy in view of improving economic activity.
"Our current OPR forecasts factor in another 25bps hike to 2.50 per cent on September 8, 2022 and for the OPR to reach our projected terminal level of 3.00 per cent by the first half of 2021," they added.
Malaysia's economy grew 8.9 per cent year-on-year (YoY) in Q2, supported by domestic demand, underpinned by the steady recovery in labour market conditions and ongoing policy support.
The higher growth was also reflective of normalising economic activity as the country moved towards endemicity and reopened international borders.