Economists see two or more OPR hikes in 2H

On Wednesday, the central bank increased the OPR by 25 bps to 2% – a move the majority of economists did not expect.

KUALA LUMPUR: Economists anticipate at least two 25 basis points (bps) overnight policy rate (OPR) hikes in the second half of this year following Bank Negara’s surprise move to raise the rate this week.

On Wednesday, the central bank increased the OPR by 25 bps to 2% – a move the majority of economists did not expect.

Only five economists in the Bloomberg survey anticipated the rate hike in the Monetary Policy Committee (MPC) meeting, which makes it the first increase since January 2018.

With Bank Negara highlighting that Malaysia’s economic growth is on a “firmer footing”, CGS-CIMB Research believes that the possibility of “two or three” OPR rate hikes is likely by end of the year.

“At the current pace of recovery, chances of two or three more OPR rate hikes by end-2022 are equally likely, in our opinion, especially given the likelihood of robust second quarter gross domestic product (GDP) growth following the large Employees Provident Fund withdrawals and high commodity-related income,” it said.

However, the research house pointed out the possibility of the rate hike being halted should there be a sharper global slowdown which could dampen the external sector.

It is worthy to note that the last hike cycle in 2010 was disrupted by the uncertainties in the global markets.

“This implies that the (central) bank may hike twice in the three meetings remaining in 2022. In addition, the end-2022 OPR rate of 2.5%, in our opinion, would be consistent with the domestic economy which may not have fully recovered from the lingering effects of the Covid-19 pandemic,” it pointed out.

Meanwhile, AmBank Research said the door for another “one-two” rate hike remained open, given the rising pressure on interest rates differential plus a weakening cross rates besides cost pressures.

Based on the research house’s forward projections, the next rate hike would be held in July by another 25 bps, followed by one more hike in September.

Bank Negara has implemented three rate hikes within 12 months in 2005 and 2010.

AmBank Research said the recent decision by the central bank to raise rates is to address the interest rate differential.

“Should the ringgit continue to weaken, the impact would be more significant on importers.

“Based on our analysis, we found that the interest rate differential between the OPR and Fed funds rate tends to have some impact on the ringgit,” it added.

Nonetheless, in addressing inflation, the Centre for Market Education said it would have preferred to see the political will to cut government spending rather than the interest rate increase.

To put the economy on a recovery path, there is a need for private investments which may be discouraged by the tightening of monetary policy, said the boutique think tank.

“We should instead leave the determination of the interest rate to market forces,” it said.