PETALING JAYA: Economists are expecting Bank Negara to announce the third consecutive hike in the overnight policy rate (OPR) this Thursday, bringing the rate to 2.5%.
While some parties fear the continuous rate hikes may prematurely erode Malaysians’ disposable income, economists opined that a higher OPR is necessary as the economy recovers and inflationary pressures persist.
In the second quarter of 2022, the country recorded a strong economic expansion of 8.9% year-on-year, and the latest inflation reading as of July 2022 was registered at 4.4%. The food inflation, particularly, hit 6.9% – the highest ever recorded.
Speaking with StarBiz, HELP University economics professor Paolo Casadio expects Bank Negara to raise the benchmark interest rate by another 25 basis points (bps), up from the current level of 2.25%.
It is noteworthy that the central bank had raised the OPR twice this year, with a hike of 25-bps each on May 11 and July 6 – marking the end of loose monetary policy to prop up the economy.
The rate hikes followed the aggressive monetary tightening in the United States, as well as other economies globally.
Casadio said the expected 25-bps rate hike this Thursday should be interpreted as a “further step” in the monetary normalisation process and hence, must be considered “neutral”.
“Recent data on very strong gross domestic product and increasing inflation fully justify that decision.
“Some more rate hikes are in the pipeline to gradually reach 3% by year-end,” he said.
Economist Manokaran Mottain also said the 25-bps increase in OPR is “highly likely”.
However, he believes the central bank may take a pause for the year after raising the rate this week.
Manokaran, who is also a director at Malaysia Venture Capital Management Bhd, said Bank Negara is likely to resume hiking the OPR again in 2023, bringing the rate to pre-pandemic level of 3%.
“We may not see an OPR hike in the November meeting. Instead, the government may introduce measures under Budget 2023 to rein in the inflationary pressure, including via targeted subsidies and handouts.
“This week’s expected OPR hike is necessary as it will be a pre-emptive move by Bank Negara to stop inflation from soaring.
“We should not see the rate hike as ‘tightening’, but rather as normalising the interest rates,” he told StarBiz.
Manokaran explained that the impact of OPR hike would typically be felt three to six months after the rate is increased.
Without a hike in the OPR this week, he said the inflation momentum would continue to pick up in coming months.
“A hike in OPR is also necessary to maintain a certain spread between the United States’ federal funds rate and Malaysia’s OPR. A spread that is too wide may cause increased capital outflows from Malaysia,” added Manokaran.
HELP University’s Casadio expects Malaysia’s overall inflation to contract towards the end of the year, reflecting the moderation in raw materials and the relative easing of supply chain disruptions.
He said that more tensions are expected on the food components due to the disruption in the production, starting from the shortage in crops that are witnessed around the world.
“The normalisation of interest rates is not to be considered like in other countries, where hikes in interest rates are a measure to curb inflation and in particular, the two components of food and energy.
“It will increase the cost of borrowing in the short term, but in a context of negative real interest rates.
“The overall effect of the interest rate hike would be neutral until the end of the year,” he said.
For 2023, Casadio thinks that Bank Negara’s stance of monetary policy will signal a clear choice between trying to reduce inflation and trying to support the cycle.
“At the moment the trade-off is not in place.
“The step by step increase of the OPR helps to manage this ‘transition’ period,” he said.
There are concerns that the continuous hikes in OPR may cripple households’ and businesses’ appetite for loans, which is often seen as an indicator of economic growth.
However, RHB Research pointed out that the demand for financing continued to trend upwards, despite the 25-bps OPR hike in early July.
In a note issued yesterday, RHB Research said the banking system’s loan applications grew 4.5% month-on-month in July.
“System loan growth remained robust, and is tracking our 2022 forecast well.
“We maintain our upbeat stance on banks, as healthy loans growth coupled with net interest margin expansion (fuelled by OPR hikes) should bode well for the sector,” it said.
Following the 25-bps OPR hike on July 6, the average lending rate ticked up by 30-bps month-on-month to 4.09%, with the base lending rate adding 24-bps month-on-month to 5.97%.
Deposit rates were also lifted, with the 12-month fixed deposit rate rising to 2.2%, while the three-month rate rose to 2.01%.
RHB Research expects Bank Negara to lift the OPR by another 25-bps to 2.5% before year-end.