Research houses mixed on expectation of year-end interest rate hike

CGS-CIMB Research maintained its expectation of no overnight policy rate (OPR) hike during the Monetary Policy Committee (MPC) final meeting in November, keeping the end-2022 interest rate at 2.50 percent.

For 2023, the brokerage firm is pricing in two 25 basis points (bps) rate hikes, bringing the OPR to 3.00 percent. However, it is less convinced of a rosy global condition ahead as the United States is likely to display a marked economic slowdown amid a series of interest rate hikes.

Meanwhile, the energy crisis in Europe will likely push the European Union into recession, and China’s property market woes could only be the tip of the iceberg, it added.

“That would mean the impetus on Malaysia’s economic growth will lie solely on the domestic economy, in which key catalysts remain limited to tourism sector recovery and what is left of the pent-up demand,” said CGS-CIMB Research in a research note today.

On Thursday, Bank Negara Malaysia raised the OPR by 25 bps to 2.50 percent, its third consecutive hike.

For exporters, CGS-CIMB Research noted that the impact of a weaker ringgit would likely be limited as the nominal effective exchange rate – a trade-weighted currency index, showed a mild appreciation year to date, it added.

“Thus far, Bank Negara’s forward guidance remains data dependent although it added a new lingo stating that the OPR is ‘not on any pre-set course’ and that its commitment is to remain flexible,” said CGS-CIMB Research.

The brokerage firm said the ringgit took a beating over the past week despite market expectation of an OPR increase, no thanks to a strong US dollar.

It said the outlook for the US dollar/ringgit is likely to remain bleak and hence, it revised its end-2022 forecast to 4.60 from 4.25 previously, led by factors including expectations of a weaker trade surplus amid the downtrend in commodity prices as well as adverse impact from developments in China.

On the other hand, Kenanga Research said Bank Negara would likely stick to its hawkish stance and to realign with the global policy rate trend to combat inflation and would continue to raise the OPR by another 25 bps at its next and final MPC meeting for the year in November, bringing it to 2.75 percent.

It noted that higher inflation and sustained recovery in domestic demand would continue to influence and back its policy decision.

“We forecast gross domestic product growth for the third quarter of 2022 to remain elevated at 8.8 percent, slightly lower than the 8.9 percent recorded in the second quarter this year.

“Nonetheless, it is projected to sharply slow to 0.5 percent in the fourth quarter, on the back of softening global demand due to the continued Covid-19 lockdowns in China and prospect of a recession in the eurozone and the US,” said Kenanga Research.

On that basis, it pointed out that Bank Negara may start to apply the brakes on its rate tightening cycle and has assigned only a 50-50 probability for another 25 bps rate hike in January next year.

- Bernama

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