Bank Negara likely to pause interest rate decision in 1H23 - research houses

KUALA LUMPUR: Bank Negara Malaysia (BNM) is likely to pause its interest rate decision and keep the overnight policy rate (OPR) unchanged at 2.75 per cent in the first half of 2023, said research houses today.

Public Investment Bank Bhd expects another 25 basis points (bps) rate hike to 3.0 per cent in the second half of 2023, but this hinges on domestic policy measures such as the possible introduction of a targeted fuel subsidy and price controls as well as global commodity price developments.

"Going forward, as BNM highlighted the significant downside risks that there could be a shift from global growth slowing down, we anticipate that any changes to the OPR will depend on how well the domestic economy does,” it said in a research note today.

On Thursday, the central bank has kept its OPR at 2.75 per cent at its first Monetary Policy Committee (MPC) meeting for 2023, defying market expectations of a 25 bps rate hike to 3.0 per cent, which ended its streak of 25 bps rate hike in the past four MPC meetings last year.

After raising its OPR by 100bps at four consecutive meetings, BNM guided that any future "further normalisation to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications to the domestic inflation and growth outlook”.

Public Investment Bank anticipated that any changes to the OPR would depend on how well the domestic economy does as BNM highlighted the significant downside risks that there could be a shift from global growth slowing down.

"In other words, we believe that the emphasis has changed slightly to aiming for sustainable economic growth within the BNM's dual mandate to strike a balance between stable inflation and economic growth,” it added.

CGS-CIMB Research noted that a big question now is the central bank’s next move as the central bank highlighted that it is "not quite done” with raising interest rates and that the decision to pause the hike was to "assess the impact of the cumulative past OPR adjustments”.

"We see this as implying BNM’s cautious outlook moving forward. In our view, there are uncertainties ahead, with the increasingly dovish central banks’ stance globally, new Malaysian Budget 2023 being announced in February as well as China’s recent reopening, which BNM may want to see clarified before its next decision,” added the brokerage firm.

It noted that the direction of the monetary policy is still upwards but with interest rate hikes likely to happen only in the second half of the year.

"Budget 2023 may not give much clarity in terms of decisions over new taxes and subsidies as the government may hold off negative announcements until the state elections to be held latest by June 2023,” said CGS-CIMB Research.

Maybank Investment Bank said every 25 bps hike or reduction in the OPR impacts banks’ net interest margins (NIM) by 2.0-3.0 bps on average.

"In light of deposit competition and expectations of deposit pricing normalising this year from previous rate hikes, we have already penciled in NIM compression of about 2.0 bps on average for banks in our coverage, versus an expansion of 6.0 bps in 2022. As such, we believe we have already taken a prudent stance on margins.

"Our forecasts currently impute just a 4.0 per cent growth in cumulative operating profit for the banks (premised on loan growth of 4.8% and higher non-interest income), and 7.0 per cent at the pre-tax level, supported by lower (but still elevated) credit costs,” it added.

The investment bank said cumulative net profit, meanwhile, is expected to rebound by 16.0 per cent year-on-year in the absence of Cukai Makmur. - Bernama