KUALA LUMPUR (May 9): Bank Negara Malaysia (BNM) did not surprise the market by keeping the overnight policy rate (OPR) at 3%.
Economists, in general, do not see any valid reason for BNM to either raise or cut the benchmark interest rate for the rest of 2024 despite contrasting regional monetary policy moves thus far.
While the depreciation of the currency against the US dollar is a concern for the country, London-based economic research firm Capital Economics contended that BNM is unlikely to follow Bank Indonesia in hiking its rates to support the currency.
"In any case, the central bank will be reassured by the fact that the ringgit has bounced back over the past week and has been outperforming its regional peers since the start of the year," it said in a note following the OPR announcement.
For context, Indonesia's central bank raised its benchmark interest rate by 25 basis points to 6.25% in April as it tried to shore up the weak rupiah.
In the same vein, Bangko Sentral ng Pilipinas also raised its key rate by 25 basis points in an off-cycle meeting in Oct 2023 amid the surging US dollar.
Capital Economics also insisted that rate cuts are unlikely due to concerns about inflation. Although inflationary pressures have remained subdued, the research firm expects subsidy rationalisation to cause inflationary pressure.
"Our forecast is that inflation will rise to above 3% by mid-year, which is above the average of the past five years and higher than what we consider to be the central bank’s comfort zone," it said.
Similarly, HSBC Global Research also argued that there are few reasons for BNM to move in either direction. As the US Federal Reserve (the Fed) pushed its rate cuts to later this year, HSBC observed that this has also pushed back many other central banks’ plans to start easing.
"On top of the Fed’s monetary trajectory, economic conditions in Malaysia also do not warrant an imminent rate cut. Both growth and inflation point to the need [for] a prolonged hold," it said.
HSBC also said that there is no reason to hike the rates, as it argued that a rate hike is "not a panacea to support the currency, particularly given the broad US dollar strength".
Although the tone and language in the latest monetary policy statement (MPS) were generally similar to the statement in March, UOB Global Economics & Markets Research highlighted that the key change in the latest MPS was regarding the global monetary policy stance.
The research firm observed that BNM had laid out the prospects of global interest rates staying higher for longer, particularly in the US, due to a slowdown in the pace of disinflation amid resilient labour markets.
This is in line with the shift in market expectations regarding the US monetary policy easing.
Despite this, UOB pointed out that BNM still anticipated that stable demand conditions and contained cost pressure will help to keep Malaysia’s inflation moderate this year.
"The outlook is subject to the implementation of domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments," it said.
UOB also expects the OPR to be kept at 3% given a balance of risks between growth and inflation. "The unchanged forward guidance in the latest MPS did not signal any potential changes in the monetary policy settings," it said.
However, UOB noted that the risks to its forecasts will depend on two key factors — firstly, the trajectory of growth particularly with spillovers from external risks and higher costs that would test the resilience of demand. Secondly, the course of inflation and extent of demand-side pressures.
"These are fundamental factors that we believe could influence the direction of Malaysia’s interest rates over the next 12 months," it said.
To recap, BNM on Thursday left the benchmark interest rate unchanged at 3% as widely expected, citing improving economic activity amid moderate inflation.
BNM has kept the policy rate unchanged for one year now since it was last raised in May 2023 by 25 basis points, bucking recent moves by its counterparts.
The next MPC meeting is scheduled to be held on July 10 and 11.