PETALING JAYA: Bank Negara would need to act considering the external uncertainties that could affect the domestic economic conditions, capital flows and the ringgit.
UOB Global Economics and Markets Research, in a report yesterday, said the central bank acting too slow or doing nothing could sow the seeds of a more persistent and elevated inflation, with more negative effects on demand and the economy.
“Rate hikes would then also need to be sharper and more abrupt in that scenario. There may also be a need to act faster now to have sufficient policy buffers in preparation for the next recession, when it happens.
“A lagged policy response by Bank Negara relative to peers could also risk excessive the ringgit volatility in the second half of this year,” it added.
Given the ongoing domestic recovery, UOB reckons there is room for the central bank to increase interest rates by another 25 basis points (bps) at both the July and September meetings of the Monetary Policy Committee.
“We expect Malaysia’s growth momentum to remain robust this quarter and next. We think Bank Negara may consider bringing forward rate hikes to keep a lid on inflation risks while growth remains decent,” it said.
The bank forecast the overnight policy rate to be at 2.5% by end of this year and 3% by end-2023.
“Even after projected hikes of 75 bps for this year, monetary policy would still be accommodative as it only reverses part of the 125 bps of rate cuts during the pandemic,” it said.
It noted there is growing consensus that global food and energy prices would continue to stay elevated for longer. As a result, it said the potential supply shocks could drive prices and inflation even higher.