PETALING JAYA: Analysts think a further hike in the overnight policy rate (OPR) this year can’t be discounted, following Bank Negara’s surprise hike of 25 basis points (bps) to 3% last week.
As inflationary pressures ease further and growth softens in the domestic economy, SPI Asset Management managing director Stephen Innes expects the central bank to keep the OPR rate unchanged for the rest of this year at 3%.
However, Innes believes Bank Negara may need to tighten policy further, if there is a reduction in fuel subsidies which could push inflation higher later this year.
“Given the focus on the increasing living cost at the upcoming regional elections, we do not expect any significant fuel subsidy changes in the next few months,” he explained.
Having a similar view, Malaysia University of Science and Technology economics professor Geoffrey Williams suggested that there should be no need for any further rise in the OPR for the rest of the year in the absence of any significant external shocks.
“If there is a negative shock, say a global downturn, then rates could be cut now that they are back to their ‘normal’ level. There is some policy space,” Williams told StarBiz.
Williams acknowledged Bank Negara’s belief that raising the interest rate will not have any negative impact on the economy.
He pointed out that the central bank viewed the economy as strong, with inflation trending down, and therefore, wanted to “normalise” the rate.
“It appears more that Bank Negara has found a window to normalise interest rates and is fine-tuning the OPR. It will have no effect on inflation this year,” he said.
According to William’s forecast, inflation is expected to reach 3% by May end and decrease to below 2.5% in July. With this in mind, he believes the decision by Bank Negara to raise the OPR by 25 bps – the first such move this year – is not forward-looking and will not alter the projected profile.
Meanwhile, in a note analysing the central bank’s move last week, CGS-CIMB Research economists maintained its forecast trajectory for the OPR to be at 3.25% by end-2023, implying another 25-bps raise in the second half of this year (2H23).
Given the positive tone of the Monetary Policy Committee’s statement for the economy, the research firm anticipates the 2023 first-quarter gross domestic product growth could surprise on the upside when announced this Friday.
“The central bank’s positive outlook on the economy was demonstrated further by the formal announcement of the lifting of the Covid-19 monetary stimulus,” it explained.
CGS-CIMB Research noted Bank Negara justified the current rate hike by stating that there were “no signs of excessive tightening negatively impacting consumption and investment activities”.
It added the central bank had previously paused rate hikes in January 2023 to assess the cumulative adjustments to the OPR.
“In Bank Negara’s annual report presentation on March 29, it highlighted expectations for the output gap to turn positive in 2H23, indicating the removal of monetary support,” the brokerage said.
Given all these factors, the research outfit believes there could be one more OPR hike by end-2023 to 3.25%. Its report highlighted a key risk to its expectation is whether a global slowdown could be sharper than expected.
“If that happens, there is a possibility Bank Negara may halt the rate hike cycle despite ongoing improvements in the domestic economy,” it concluded.
