Central bank forecast to hold OPR steady

PETALING JAYA: Bank Negara is expected to continue to hold steady its overnight policy rate (OPR) in the upcoming Monetary Policy Committee (MPC) meeting this week in order to assess the impact of previous OPR hikes on the real economy, says AmBank Group Research.

The research house opined that Bank Negara will likely increase the OPR by another 25 basis points in the second quarter of 2023 (2Q23) or beyond, to the pre-pandemic rate of 3%.


“We view the probability of a rate hike in March 2023 has dissipated as compared to our earlier assessment at the beginning of 2023.

“Determining the lag effect from the rate normalisation that had taken place since May 2022 may require a longer time frame.

“Our analysis shows the impact of the interest rate hike would take effect within eight to 10 months,” said AmBank Group Research in a report.

While the Federal Reserve is focused on bringing down inflation even at the expense of the growth, AmBank believes the OPR at 3% will not stifle economic growth but will facilitate economic recovery back to pre-pandemic levels.

“In comparison, we noticed that consensus’s OPR forecast ranges from 2.75% to 3.25%. We feel there is a need to keep interest rates above the inflation rate.

“As the real interest rate (defined as OPR minus inflation rate) is a function of two variables, we are only looking at a gradual decline in inflation rate which also explains our rate hike call,” said the research house.

It added past data showed it was not common for the real interest rate to be in the negative territory for two consecutive years.

Bank Negara’s MPC is set to meet for the second time this year on March 8 and 9.

The MPC held its OPR unchanged at 2.75% in its previous meeting in January 2023.

Back then, the central bank said the monetary policy’s stance remains accommodative and supportive of economic growth.

“Today’s decision (OPR unchanged) allows the MPC to assess the impact of the cumulative past OPR adjustments, given the lag effects of monetary policy on the economy.

“The MPC will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth,” it had said in its statement.

The country’s headline inflation contracted to 3.7% in January 2023 from 3.8% in December 2022.

Core inflation declined to 3.9% in January this year from 4.1% in December last year.

“Core inflation continued its downward trend after peaking at 4.2% year-on-year in November 2022.

“Guided by the historical trend analysis, it would take around 10 months for core inflation to approach the 2% levels. Assuming the current trend persists, core inflation may move closer to 2% by October this year,” said the research outfit.

Moreover, domestic wage growth is also on a downward trend, particularly for the manufacturing and service sectors, after peaking in 2Q22.

Employment growth, after having peaked July 2022, is also slowing down.

All this points to a declining core inflation in 2023, added AmBank.

The research house expects the easing of commodity prices along with improvements in supply chains to lower headline inflation this year to 3%.

“Price pressure coming from the supply side is projected to be manageable going forward.

“Nonetheless, inflation remains above pre-pandemic levels and historical average.

“As such, this forms our basis in maintaining the outlook of another 25 basis points hike in the OPR for the whole of 2023,” said the research house.

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