PETALING JAYA: Bank Negara Malaysia’s (BNM) decision to keep the overnight policy rate (OPR) unchanged is appropriate, despite ongoing global uncertainties, as current price pressures stem largely from supply shocks.
Given the current backdrop of heightened global uncertainty marked by geopolitical tensions, some argue that the central bank should hike rates as a pre-emptive measure to keep inflation in check, particularly as price pressures are expected to rise following the likelihood of further increases in fuel costs.
However, Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said the inflationary pressures at this juncture stem mainly from supply-side factors rather than overheating demand.
He is of the view that inflation pressures should be contained, as long as the government can provide assistance in the form of subsidies.
“Back in June 2008, fuel prices were jacked up by seven to eight sen per litre. There were a lot of calls for BNM to raise interest rates. However, the central bank did not do so, because the source of inflation was a supply shock, and not demand-related.
“This is why I am not inclined to say that BNM should raise interest rates now. I think they should maintain it. The government has said that it wants to maintain subsidies, hence on the inflation front, it is well taken care of. The concern now is more on growth as it will be affected should the supply disruption be prolonged,” he told StarBiz.
Mohd Afzanizam said the central bank is expected to keep OPR steady for “as long as possible”.
“The downside risk to global growth has become elevated due to the disruption in the logistic sectors and how it can impact the fuel cost. Hence, the best course of action is to keep the OPR steady with a view for possible easing if the current shocks start to affect the growth momentum materially,” he said.
That said, Mohd Afzanizam said whether BNM will hike or maintain the OPR this year “really depends on the duration and severity of the war in the Middle East”.
“I would think monetary easing is much more likely than rate hikes,” he said.
Brent crude oil is currently at US$78.92 per barrel, having increased by more than 10% since the start of the Middle East war, with market watchers closely monitoring how long the conflict will persist. Concerns are now centred on the Strait of Hormuz – a critical global energy chokepoint through which about one-fifth of the world’s oil supply passes – amid fears that the conflict could disrupt shipping in the area.
Meanwhile, Tradeview Capital fund manager Neoh Jia Man said the risk of a potential OPR hike has increased with the Middle East conflict.
“The central bank may prefer to wait for more data before they make a decision. For BNM to hike rates, the war has to be prolonged with disruption to oil transportation and rising inflationary pressures.
“Right now, it is still uncertain as to how long the disruption at the Strait of Hormuz will be. It is not certain that the central bank will hold rates throughout the year as it really depends on how the war pans out,” he said.
Sunway University economics professor Dr Yeah Kim Leng said it would pose a dilemma for the Monetary Policy Committee should the economy face a stagflation scenario, where growth stalls because of global recession and inflation spikes due to skyrocketing oil prices, particularly if the shutdown of the Strait of Hormuz extends throughout the year.
“It is noteworthy that the strengthening of the Malaysian economic fundamentals over the past several years has placed the country in a better position to weather the war-related economic turbulence that is likely to lead to slower rather than improved growth this year as prognosticated by the International Monetary Fund,” he said.
