This article first appeared in The Edge Malaysia Weekly on May 1, 2023 - May 7, 2023

The focus at home this holiday-shortened week will be the interest rate decisions of Bank Negara Malaysia (May 3), the US Federal Reserve (Fed) and the European Central Bank ([ECB] both on May 4).

Local markets are closed on Monday and Thursday in conjunction with Labour Day and Wesak, respectively.

Bank Negara is largely expected to keep the overnight policy rate unchanged at its third monetary policy meeting of the year. Last year, it made four 25-basis-point (bps) hikes in the OPR, the last of which was on Nov 3, and since then, it has yet to make any change to the rate.

A Reuters poll last week showed that 21 of 25 economists expect the central bank to maintain the OPR at 2.75% at its meeting this Wednesday. The remaining four forecast a 25bps rise.

“We continue to see room for further normalisation of monetary policy, on the back of sticky core inflationary pressures, still positive domestic growth momentum and domestic financial stability. As such, we keep our view for a final interest rate hike of 25bps at this meeting, which will take the OPR back to the pre-pandemic level of 3%,” UOB Global Economics & Markets Research said in an April 28 outlook report.

“Thereafter, Bank Negara will [likely] leave the OPR unchanged for the rest of the year, in cognisance of a softer inflation outlook globally in 2H2023, an expected end to [the] global rate hike cycle by mid-2023, and rising recession risks in advanced economies,” it adds.

The central bank started hiking rates in May last year in a bid to combat inflation. Inflation, which hit a peak of 4.7% in August last year, dropped to a nine-month low of 3.4% last month.

Over in the US, the Fed is widely seen to raise interest rates by 25bps. A Bloomberg poll of 88 economists as of last Friday shows that the majority (79) expect the Fed to raise rates by 25bps, which will bring the federal funds rate to a range of 5.00% to 5.25%. Eight of the economists polled expect a pause, while one thinks there may be a 50bps hike.

“The US banking sector developments have raised valid concerns on the outlook, complicating the Fed’s inflation fight as price concerns are mixed in a pot of financial market uncertainty. If our base case of no systemic impact on the US financial sector remains valid, it is reasonable to expect the Fed to continue to stay focused on fighting inflation and push forward with its rate-hike cycle. Thus, we will continue to see the Fed hiking rates by a final 25bps to 5.00%-5.25% [in May]. We expect no rate cuts this year and this terminal rate of 5.25% to last through 2023,” UOB opines.

As for the ECB, two of three economists polled by Bloomberg as of last Friday expect it to raise policy rates by 50bps, while the remainder expects a smaller 25bps hike. UOB is forecasting a 25bps hike as it sees the ECB wanting to tackle banking woes as well as inflation.

“Further out, even if the ECB were to continue hiking, we think it would be prudent to move in clips of 25bps,” it says.

In Asia, Hong Kong and Indonesia are scheduled to announce their first-quarter gross domestic product numbers on Tuesday and Friday, respectively.

Indonesia’s economy, the largest in Southeast Asia, expanded by 5.31% last year, its best annual growth rate in nine years. A Bloomberg survey sees it growing 4.97% year on year in the first quarter this year, only slightly slower than the 5.01% growth in the preceding quarter.

In comparison, numbers from Hong Kong are likely to be less rosy. The economy, which contracted by 3.5% last year, fell 4.2% in the final quarter as weakening global demand and higher interest rates hurt exports and spending. Nevertheless, Hong Kong is expected to show a recovery this year on the back of China’s own recovery and a rebound in tourism.

In China, it will be a relatively quiet week in terms of economic data releases as the country will be on an extended Labour Day break until Wednesday. Nevertheless, there will be the private Caixin manufacturing Purchasing Managers’ Index (PMI) data on Thursday, and the services PMI on Friday. China’s National Bureau of Statistics had earlier put its official manufacturing PMI at 51.9 for March, a decline from 52.6 in February.

South Korea will release its April trade data on Monday, while Australia and the US will each put out March trade data on Thursday.

Most markets in Europe will close on Monday for the May Day holiday, while Japan will have three consecutive days of holidays from Wednesday to Friday.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.