PETALING JAYA: Bank Negara is likely to raise interest rates this year following in the footsteps of the United States Federal Reserve, which plans to raise rates by three to four times in 2022 to fight inflation.
According to HSBC Group Asian economics research co-head Frederic Neumann, Bank Negara could raise its overnight policy rate (OPR) by 50 basis points (bps) this year on the back of stronger domestic demand and strong export numbers, as the world economy recovers from the impact of the Covid-19 pandemic.
“Within the Asia region, we expect Malaysia is likely to experience one of the strongest domestic demand recoveries.
“On the investment side, particularly foreign investment, we think Malaysia will be the key beneficiary under the current trends, and the country’s exports are likely to remain supported.
“There is a desire by Bank Negara to start to normalise its interest rates again, relatively swiftly.
“This is where the 50bps hike comes through,” he said at the HSBC Asian outlook 2022 media briefing yesterday.
Bank Negara has kept its OPR at 1.75% since July 2020, when it cut the rate from 2% to support economic growth that was affected by the Covid-19 pandemic and movement control order to curb the infection rate.
The OPR at 1.75% is the lowest on record since 2004.
In a statement after the briefing, HSBC said as Malaysia’s labour market strengthens, the country’s core inflation may gradually trend higher to 2% by end-2022, thus, allowing Bank Negara to initiate a gradual monetary tightening process in the second half of 2022.
“We expect a total of 100bps of rate hikes over 2022 and 2023.
“We believe the Malaysian economy has one of the brighter outlooks in the region,” the banking group said.
HSBC also expects the Malaysian economy to grow 3.6% in 2021 and accelerate to 5.6% this year.
It added that Malaysia had one of the highest vaccination rates in Asia, allowing a high degree of resilience.
“While restrictions may be re-imposed, we believe the government will likely opt for highly targeted measures as opposed to lockdowns.
“Malaysia is currently attracting the highest share of foreign direct investment (FDI) commitments in Asean, overtaking Vietnam.
“This bodes well for the future of manufacturing.
“Malaysia’s manufacturing outlook remains impressively strong,” HSBC said.
Despite the positive outlook on the economy, the interest rate hike could pose the risk of downward pressure on the local stock market.
HSBC chief Asia equity strategist Herald van der Linde anticipates that funds could reduce their exposure to Malaysian equities due to potential rising interest rates.
“In contrast to a few of the other Asean markets, the situation in Malaysia is that you have domestic interest rates rising, that’s not positive for the market.
“Most funds are already pretty overweight on Malaysia.
“So, they can’t really buy that much more if they wanted to,” he said.
He said some of the funds would probably reduce their exposure to Malaysian equities and move to other Asean markets such as the Philippines and Indonesia.
“Growth in all markets is coming down because last year we had a large bounce in earnings growth,” he added.
While there were still a lot of uncertainties, HSBC also believes that the ringgit is undervalued and the local currency could see recovery this year as the Malaysian economy emerges from a “double-dip” recession.
It expects the ringgit to be supported by the higher FDI inflows and the interest rate hike by the central bank should help the ringgit to maintain a “yield advantage against the US dollar” and keep real rates positive.
“Greater confidence in the domestic economy and in local assets would help curb residents’ foreign asset accumulation,” it added.
However, HSBC warned that its positive views on the ringgit were dependent on the Covid-19 developments and that political uncertainty may weigh on sentiment and affect capital flows.