Bank Negara likely to hike rates next quarter

For now, Bank Negara enjoys the liberty of keeping rates low as price pressures remain subdued but supply chain disruptions and the ongoing Russia-Ukraine war pose a major risk to that outlook.

SINGAPORE: Bank Negara will keep its interest rate steady this week to support a still-nascent economic recovery, according to a Reuters poll, but start tightening policy next quarter to avert rising inflationary pressures.

That accommodative stance was in stark contrast to other major central banks and some of its Asian peers which are hiking interest rates at a much faster rate than earlier thought to rein in stubbornly high inflation.

For now, Bank Negara enjoys the liberty of keeping rates low as price pressures remain subdued but supply chain disruptions and the ongoing Russia-Ukraine war pose a major risk to that outlook.

The April 28 to May 6 poll of 18 economists predicted Bank Negara would keep its overnight policy rate unchanged at 1.75% tomorrow.

“We think that Bank Negara would want to see a durable economic recovery from the pandemic amid growing downside risks before normalising policy in early second half of 2022, despite already having signalled the prospects to withdraw significant monetary support,” said Chua Han Teng, economist at DBS.

But widening interest rate differentials with some regional players and the US Federal Reserve has prompted a handful of participants, four of 18 economists to predict a rate hike to come as early as this month.

“In view of expected improvement in economic conditions and upward price pressures, we think Bank Negara is on the cusp of raising the overnight policy rate,” said Julia Goh, senior economist at UOB, who expected a 25 basis point hike this month.

“Bank Negara has also cautioned that keeping interest rates low for a prolonged period could lead to emergence of financial imbalances with excessive risk-taking and unhealthy build-up of leverage.”

However, the survey findings suggested a hike of 25 basis points next quarter to 2%, followed by another quarter-point hike in the fourth quarter to end the year at 2.25%.

Those expectations were unchanged from an April poll.

The central bank expects the Malaysian economy to grow between 5.3% and 6.3% this year, slightly lower than the previously projected 5.5% and 6.5%, on higher global demand and stronger commodity prices.

Malaysia is net exporter of oil and the second largest producer of palm oil.

Inflation was estimated to average between 2.2% to 3.2% in 2022, a little above the central bank’s target range of 2% to 3%. — Reuters