Surprise rate hike

“The move to up rates could now mean more of containing capital outflows and supporting the ringgit. This could now mean that there is ample room for another rate hike in the second half of the year,” AmBank Group chief economist Anthony Dass, who is also a member of the Economic Action Council Secretariat, said.

PETALING JAYA: Bank Negara has in a surprise move hiked the key benchmark interest rate, the overnight policy rate (OPR), by 25 basis points (bps) to 2% against most economists’ expectations of it being kept at 1.75%.

Economists told StarBiz they were startled by the central bank’s decision to raise the OPR so soon, but agreed the move could be to contain capital outflows and support the ringgit.

Furthermore, they added that Bank Negara does not want to be left behind the curve in raising interest rates in line with other global banks due to rising inflationary pressure and geopolitical risk.

“We were looking at July for the first rate hike. Such early rate hike decisions showed Bank Negara prefers to be in line with the global central banks which have been raising rates. While inflation remains a concern, it’s well within the tolerable level with economic recovery still facing downside risk.

“The move to up rates could now mean more of containing capital outflows and supporting the ringgit. This could now mean that there is ample room for another rate hike in the second half of the year,” AmBank Group chief economist Anthony Dass, who is also a member of the Economic Action Council Secretariat, said.

Foreign reserves data released yesterday showed Bank Negara’s international reserves had dropped by US$1.9bil (RM8.32bil) in a two-week period to US$112.5bil (RM492.4bil).

Dass said another 25bps hike could happen in July should the data support it and follow the global central banks to continue maintaining their aggressive rate hike policy.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, who also expects another 25 bps OPR hike this year, said it appears that the Bank Negara appears to be quite comfortable with the prevailing economic growth trajectory.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said another 25bps hike is quite likely as Bank Negara would need to be extremely careful in removing the monetary policy accommodation.

"Although they continued to acknowledge the downside risks, the excessive monetary policy accommodation would need to be removed which otherwise can cause other problems such as overheating economy, excessive risk taking as well high level of indebtedness among households and businesses.

"The door for higher OPR in the near term is still open. Perhaps, another 25 basis points hike is quite likely as Bank Negara would need to be extremely careful in removing the monetary policy accommodation," he added.

OCBC Bank economist Wellian Wiranto sees the central bank hiking up the OPR once again in the September meeting by 25bps.

OCBC Bank economist Wellian Wiranto sees the central bank hiking up the OPR once again in the September meeting by 25bps.

“If growth continues to be sustained and the underlying inflationary pressures remain considerable, it will hike by another notch to bring the OPR to 2.50% by year-end.

“On the flip side, if some of the downside risk to growth that the central bank has pointed out unfortunately materialises, it will prioritise supporting the economic recovery and leave the rate unchanged in the last quarter, ending the year at 2.25% instead,” Wellian noted.

Meanwhile, economist Shankaran Nambiar, who is also expecting a 25bps hike in the OPR this year, thought Bank Negara would have delayed the decision to raise the OPR.

“I do think that there are signs that the economy is picking up. Of course, the wholesale and retail sectors are doing better and so are tourism and manufacturing. There are signs that the economy is improving, but it is not clear if the economy will welcome a rate hike at this point and what exactly the rate hike will help do in combating inflation,” he said.

The inflation rate was at 2.2% in February and March 2022.

“Having said that, there would be a tendency for central banks to raise their rates, and Bank Negara will not want to be lagging behind. Ultimately, the central bank will have to raise the OPR. Furthermore, the central bank is probably acting on preliminary data that is likely to be very positive,” Shankaran said.

Fourteen out of the 19 economists polled earlier by Bloomberg said the central bank would keep the OPR rate at 1.75%. Only the remaining five analysts expected a 25bps hike. The bank last adjusted borrowing costs in July 2020.

At its Monetary Policy Committee (MPC) meeting yesterday, the central bank said over the course of the Covid-19 crisis, the OPR has been reduced by a cumulative 125bps to a historic low of 1.75% to provide support for the economy.

The unprecedented conditions that necessitated such actions have since abated, it said, noting that with the domestic growth on a firmer footing, the MPC decided to begin reducing the degree of monetary accommodation.

This would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability, the central bank said.

“The sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity. These have partly cushioned the impact of the military conflict in Ukraine and the strict containment measures in China.

“Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the United States. Consequently, several central banks are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures.

“The global growth outlook will continue to be affected by the developments surrounding the conflict in Ukraine, Covid-19 pandemic, global supply chain conditions, commodity price shocks, and financial market volatility,” the bank said.

For the Malaysian economy, the central bank said the latest indicators showed that growth was on firmer footing, driven by strengthening domestic demand amid sustained export growth. The labour market was further lifted by a lower unemployment rate, higher labour participation and better income prospects, it added.

“The transition to endemicity on April 1, 2022 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders.

“Investment activity and prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook. However, risks to growth remain, which include weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding Covid-19,” the bank said.

Headline inflation, according to the bank, is projected to average between 2.2% and 3.2% in 2022. Given the improvement in economic activity amid lingering cost pressures, underlying inflation, as measured by core inflation, is expected to trend higher to average between 2.0% - 3.0% in 2022.

“Nevertheless, upward pressure on prices would be partly contained by existing price controls and the continued spare capacity in the economy. The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures on administered prices,” Bank Negara said.