OPR hike widely expected amid domestic economy’s continued improvement

The 25 basis points (bps) hike in the overnight policy rate (OPR) announced by Bank Negara Malaysia (BNM) yesterday to 2.50 percent in its fifth Monetary Policy Committee (MPC) meeting of 2022 is widely expected amid continued improvements in the domestic economy.

In a note yesterday, MIDF Research said BNM highlighted that the global economy remained on an expansion path despite a slower pace and improvement in Malaysia’s labour market conditions, with domestic spending continuing to support the recovery in local economic activity.

However, the research house noted that BNM also pointed out that global growth faces challenges from tightening monetary policy in many economies, elevated inflationary pressure and pandemic management measures in China.

“We view the decision to raise OPR by another 25 bps as timely with the steady expansion of the domestic economy, as reflected in macroeconomic data and core inflation trends,” it said.

MIDF said the focus of BNM’s monetary policy setting is to ensure a sustainable recovery of Malaysia’s economy and with the rising core inflation trend and stronger-than-expected domestic demand, it expected further policy normalisation will likely be carried out in the November 2022 MPC meeting.

“We expect another 25 bps hike in the final meeting this year. However, the decision will be subject to the stability of economic growth, the pace of price increases and a further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.

“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook, such as persistently high inflation and a further rise in household indebtedness,” MIDF Research said.

Curbing inflation

Echoing MIDF Research, Sunway University economist Yeah Kim Leng said BNM's third 0.25 percent interest rate increase is widely expected given the strong second quarter growth and sustained performance anticipated in the second half of the year amid the gradual rise in inflation.

“The continued normalisation signals the central bank's view that the country's growth remains on track while keeping demand pressures from building up too quickly to fuel inflation,” Yeah told Bernama.

Meanwhile, Putra Business School economics analyst Ahmed Razman Abdul Latiff opined that BNM will continue to use OPR hike as a measure to curb inflation and he expects the tightening move to continue until next year.

“This is due to the fact that the OPR is still low at 2.50 percent compared to the rate before the pandemic which was at 3.25 percent. As long as the OPR remained low, it will not be effective to reduce the inflation rate,” Razman told Bernama.

He said subsidies given by the federal government, which include those of selected basic products and services amounting to almost RM80 billion this year, are seen as a more effective measure in keeping inflation low.

“In the long run, the focus should be given to boost domestic productions to reduce reliance on imports,” Razman added.

- Bernama

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