PETALING JAYA: Economists expect Bank Negara to announce the third consecutive overnight rate hike (OPR) on Thursday, taking the rate to 2.5%.
While some parties worry that continued rate hikes will prematurely erode Malaysians’ disposable income, economists have said a higher OPR is needed as the economy recovers and inflationary pressures persist.
In the second quarter of 2022, the country recorded a strong economic expansion of 8.9% year-on-year, and the latest inflation reading in July 2022 was recorded at 4.4%. Food inflation, in particular, reached 6.9% – the highest on record.
Speaking to StarBiz, HELP University Economics Professor Paolo Casadio expects Bank Negara to increase the benchmark interest rate by another 25 basis points (bps), from the current level. 2.25%.
It should be noted that the central bank has raised the OPR twice this year, with a hike of 25 basis points each on May 11 and July 6 – marking the end of accommodative monetary policy to support the economy.
The rate hikes followed aggressive monetary tightening in the United States, as well as in other economies around the world.
Casadio said Thursday’s expected 25 basis point rate hike should be interpreted as a “further step” in the process of monetary normalization and, therefore, should be viewed as “neutral.”
“Recent data on a very strong gross domestic product and rising inflation fully justify this decision.
“Further rate hikes are on the way to gradually reach 3% by the end of the year,” he said.
Economist Manokaran Mottain also said the 25 basis point increase in the OPR is “very likely”.
However, he thinks the central bank could pause for the year after raising the rate this week.
Manokaran, who is also a director of Malaysia Venture Capital Management Bhd, said Bank Negara is expected to resume raising the RPO in 2023, bringing the rate down to the pre-pandemic level of 3%.
“We may not see an increase in OPR at the November meeting. Instead, the government could introduce measures as part of the 2023 budget to curb inflationary pressure, including through targeted subsidies and aid.
“The planned rise in the OPR this week is necessary as it will be a preventive measure by Bank Negara to prevent inflation from skyrocketing.
“We shouldn’t view the rate hike as ‘tightening,’ but rather as a normalization of interest rates,” he told StarBiz.
Manokaran explained that the impact of the OPR hike would typically be felt three to six months after the rate increase.
Without an OPR hike this week, he said inflation momentum would continue to pick up in the coming months.
“An increase in the OPR is also necessary to maintain a certain spread between the US federal funds rate and the Malaysian OPR. Too large a gap can lead to increased capital outflow from Malaysia,” Manokaran added.
HELP University’s Casadio expects Malaysia’s headline inflation to contract towards the end of the year, reflecting the moderation in commodities and the relative easing of supply chain disruptions.
He said more stress is expected on food components due to the disruption of production, starting with the shortage of crops seen around the world.
“The normalization of interest rates is not to be considered as in other countries, where interest rate hikes are a measure to curb inflation and in particular, the two components of food and energy.
“This will increase the cost of borrowing in the short term, but in an environment of negative real interest rates.
“The overall effect of higher interest rates would be neutral until the end of the year,” he said.
For 2023, Casadio believes that Bank Negara’s monetary policy stance will signal a clear choice between trying to reduce inflation and trying to support the cycle.
“At the moment, the compromise is not in place.
“Gradually increasing OPR helps manage this ‘transition’ period,” he said.
There are concerns that continued RPO hikes could cripple household and business appetite for loans, which is often seen as an indicator of economic growth.
However, RHB Research pointed out that funding demand continues to trend higher, despite the 25 basis point rise in RPO in early July.
In a note released yesterday, RHB Research said banking system loan applications rose 4.5% month-on-month in July.
“System loan growth has remained robust and is tracking well with our guidance for 2022.
“We maintain our bullish stance on banks as healthy loan growth coupled with net interest margin expansion (fueled by RPO hikes) should bode well for the sector,” he said. -he declares.
After the 25 basis point rise in the OPR on July 6, the average lending rate rose 30 basis points month-on-month to 4.09%, with the base lending rate adding 24 basis points in month-on-month at 5.97%.
Deposit rates were also raised, with the 12-month fixed deposit rate rising to 2.2%, while the three-month rate rose to 2.01%.
RHB Research expects Bank Negara to raise the OPR another 25 basis points to 2.5% before the end of the year.