Finally, Bank Negara Malaysia (BNM) raises OPR by 25bps to 2.5% | Investment Series

On Thursday, September 8, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) increased the overnight policy rate (OPR) by 25 basis points (bps) to 2.5% in line with expectations for further normalization of monetary policy as the nation's economic growth and inflation pick up speed.

This year's third successive 25bps OPR increase by the MPC is in line with the predictions of 17 economists surveyed by Bloomberg, increasing the increase year to date to 75bps.

According to a statement from the central bank, the OPR's corridor's ceiling and floor rates have proportionately increased to 2.75% and 2.25%, respectively.

"With the Malaysian economy still expected to continue in a favourable direction, the MPC agreed to increase the level of monetary accommodation. The posture of monetary policy is still accommodating and supportive of economic growth at the current OPR level, it stated.

The OPR hike coincided with an improvement in Malaysia's expectation for GDP growth in 2022, with the Bloomberg consensus prediction rising to 6.8% from 6.2% in August.

According to the statement from BNM, the MPC is not following any predetermined plan and will keep evaluating the effects of changing circumstances on the forecast for domestic inflation and GDP.

According to the statement, "Any further adjustments to the monetary policy settings would be moderate and gradual, ensuring that monetary policy remains accommodating to promote a sustainable economic growth in an environment of price stability."

The most recent MPC OPR rate of 2.5% reduced the gap to the 2.25%–2.5% US Fed Fund rate, which is widely anticipated to be increased by another 75bps later this month, and drew closer to its pre–pandemic level of 3.0%.

According to BNM, signs for the future indicate to steady growth supported by private sector spending.

"With additional declines in unemployment and underemployment, labour market conditions and income prospects are still favourable. International border reopening will boost the tourism industry. The completion of multi-year projects would promote investment activity and prospects, it stated.

However, the central bank stated that due to the slowing of global development, foreign demand is anticipated to weaken. Furthermore, it stated that Malaysia's growth is not anticipated to be hampered by the anticipated rise in volatility in the international financial and foreign exchange markets.

"Domestic liquidity is still enough, and the financial and foreign exchange markets continue to operate in an orderly manner. Additionally, financial institutions are still running with substantial capital and liquidity reserves. These will guarantee that financial intermediation continues to assist the economy, it was stated.

Future adverse risks to the local economy, according to BNM, come from deteriorating supply chain disruptions, escalating geopolitical conflicts, and weaker-than-expected global growth.

"The impact of monetary policy tightening in most economies and pandemic management measures in China are projected to present hurdles to global growth.

Downside risks to the growth projection include high cost pressures, a potential energy crisis in Europe, and a dramatic tightening of financial market conditions, it was stated.

Regarding inflation, according to BNM, the headline consumer price index (CPI) is anticipated to reach its high in the third quarter of 2022 (3Q2022) before subsequently declining as a result of dissipating base effects and in conjunction with the anticipated easing of global commodity prices.

With some indications of demand-driven pressures in the midst of the high-cost environment, underlying inflation, as measured by core inflation, is anticipated to average closer to the upper half of the 2.0%-3.0% projected range in 2022.

According to the report, the economy's current spare capacity, fuel subsidies, and price restrictions will help to keep inflationary pressures in check.

The central bank noted that the inflation outlook is still influenced by domestic policy decisions as well as changes in the price of commodities on a global scale, primarily as a result of the protracted supply interruptions and ongoing military situation in Ukraine. From 2.2% in 1Q2022, Malaysia's headline inflation increased by 2.8% year over year in the second quarter.

After keeping the benchmark interest rate at a historically low of 1.75% since July 2020 to mitigate the pandemic's economic impact, the MPC increased OPR in May for the first time in two years.

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