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Bank Negara Malaysia (BNM) hiked for a third consecutive meeting by 25bps, bringing its Overnight Policy Rate (OPR) to 2.50%. It has raised interest rates by a total of 75bps since the start of its policy normalisation cycle in May. The increases partially reversed the 125bps worth of cuts to support the economy through the pandemic. The moves have been in line with policymakers’ rhetoric to withdraw the degree of monetary accommodation as Malaysia progresses past the pandemic, and possibly also to pre-emptively tackle rising underlying price pressures.
BNM, however, raised the possibility of a temporary pause in its hiking cycle in the released policy statement. This marked a significant change compared to the July statement. BNM added that it is ‘not on any pre-set course and will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth'.
BNM comments on the economy reflect its cautiousness, in our view. On growth, BNM is notably vigilant about the downside risks surrounding the global growth outlook, despite its continued optimism on Malaysian domestic prospects driven by positive catalysts from the shift to endemicity. This could warrant a pause. Other than challenges from global monetary tightening and China’s weakness, the central bank is wary of elevated cost pressures and Europe’s energy insecurity.
Regarding inflation, BNM expects headline figures to peak in 3Q22 and moderate thereafter, even as core inflation inches higher and average closer to the upper end of its 2.0% - 3.0% forecast range in 2022, with some signs of demand-pull pressures. Malaysia’s inflation has so far been relatively contained vs regional peers, primarily helped by the government’s fuel subsidies policies. July’s headline inflation rose to 4.4% YoY, but year-to-date averaged at 2.8%. The government’s deliberations on a targeted fuel subsidy approach therefore pose a big uncertainty to the inflation trajectory. Details might be revealed during the upcoming 2023 budget announcement slated for early October, likely alongside the government’s forward-looking economic assessment for 2023. BNM’s final policy rate decision for 2022 will be held in early-November. While risk to our base case for a 25bps hike in 4Q22 is tilted to the downside, we await further data points and the budget release before adjusting our forecasts. A potential pause in BNM’s OPR at a time when the US Fed is still set to hike aggressively would narrow Malaysian-US interest rate differentials. This would add volatility to an already weakening Malaysian ringgit vs the US dollar.
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