KUALA LUMPUR (Nov 7): Fitch Solutions Country Risk and Industry Research expects Malaysia's interest rates to peak at 3.25%.

In a statement last Friday (Nov 4), the firm said it expects inflation to stay above its historical average, and with real interest rates still negative, this should prompt Bank Negara Malaysia (BNM) to continue normalising its monetary policy settings.

“Risks to our interest rate forecasts are weighted to the upside, given that the US Federal Reserve (Fed) remains quite hawkish, which could trigger more selling pressure on the ringgit if real interest rate differentials shift sharply in favour of the US,” it said.

Fitch Solutions said that as expected, BNM hiked its overnight policy rate again to 2.75% last Thurday, its final scheduled meeting for the year.

The firm added that this came after the Fed hiked interest rates by 75 basis points (bps) last Wednesday.

It said the 25 bps hike by BNM was the fourth straight increase of that magnitude since the central bank began its rate hiking cycle in May, taking its cumulative rate hikes to 100 bps.

“Going into 2023, we maintain our view that BNM will raise interest rates by an additional 50 bps to a peak of 3.25% in 2023.

“However, risks are firmly weighted to the upside as major central banks around the world, particularly the US, remain quite hawkish, which could prompt BNM to hike interest rates more aggressively in order to safeguard ringgit stability,” it said.

Fitch Solutions said it now expects headline inflation to moderate over the coming months to 3.7% by end-2022 (from 4.0% previously), and average 3.4% in 2022 (from 3.5% previously), before averaging about 3.1% in 2023.

“Malaysia’s headline inflation figure eased slightly to 4.5% year-on-year in September, from a 16-month high of 4.7% in August, peaking slightly earlier than we previously expected.

“Despite slight revisions of our inflation forecasts, the key takeaway is that price pressures will likely remain higher than the historical average of 1.5% (2016-2021), while real interest rates remain negative.

Fitch Solutions said this suggests to us that there is more room for BNM to hike interest rates back to its pre-Covid levels of around 3.00%-3.25% to safeguard macroeconomic stability.

It said despite existing price controls and fuel subsidies, price pressures in Malaysia have picked up due to a recovery in domestic demand and elevated food prices, and expects these dynamics to continue into 2023.

Fitch Solutions also said risks to its interest rate forecasts are weighted to the upside as there is an increasing likelihood of higher terminal rates in many of the developed markets than previously expected.

It said that for instance, Fed chair Jerome Powell said in the meeting last Wednesday that "incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected", which points to significant upside risk over the near term.