Malaysia: BNM done with hiking cycle

Surprise 25 bps hike after two pauses.
Group Research, Chua Han Teng04 May 2023
    Photo credit: Unsplash/Adobe Stock Photo

    Bank Negara Malaysia (BNM) raised its overnight policy rate (OPR) by 25bps to 3.00% on May 3 against consensus expectations for a hold, and after keeping policy unchanged in 2023’s first two meetings. The move returned the OPR to the pre-crisis level in 4Q19, removing the monetary support provided during the pandemic-induced recession. Recognising resilient domestic demand despite moderating exports, BNM’s policy normalisation appeared to be a pre-emptive decision to guard against risks of future financial imbalances and ward off upside inflation risks. Looking at household debt-to-GDP for instance, Malaysia’s 81.2% in end-2022 was among the highest in the region and a source of vulnerability. The normalised borrowing costs would discourage further debt accumulation.

    Where will monetary policy go next? We think that BNM is done with the hiking cycle, and the OPR is likely to be steady at 3.00% for the rest of 2023 for four reasons. First, unlike the previous two meetings, policymakers have not explicitly left the door open for further normalisation. Second, Malaysia’s externally exposed economy remains at the mercy of an uncertain global economic environment plagued by tight monetary policy in advanced economies and lingering geopolitical tensions, despite still resilient domestic demand helped by household spending, tourism recovery, and infrastructure investment. Policymakers, therefore, would not want to overtighten monetary conditions.

    Third, we expect CPI inflation, both headline and core, to moderate in the remainder of 2023 amid easing cost pass-through from correcting commodity prices, although changes to the targeted subsidy scheme remain the key upside wildcard to the inflation outlook. Lastly, BNM staying on status quo would be in line with our expectations for the US Federal Reserve to keep policy unchanged for the rest of 2023. Impetus for upward policy adjustments by BNM to maintain interest rate differentials to curb ringgit depreciation vs the US dollar would be lower. 

    Chua Han Teng, CFA

    Economist - Asean
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