KUALA LUMPUR: BMI, a Fitch Solutions company, expects Bank Negara Malaysia (BNM) to hold its overnight policy rate (OPR) at 3.0 per cent through the end of 2024.
It noted that the central bank had on March 7 left its OPR on hold at 3.0 per cent for the fifth consecutive meeting, in line with consensus and BMI’s expectations.
The research firm said apart from the central bank’s oblique reference to an “undervalued” currency, which was notably absent from prior policy statements, little else changed, particularly for forward guidance.
In a note today, BMI said there are two reasons supporting its view that the BNM will keep rates on hold at its next meeting on May 9, 2024.
Firstly, the current inflation trajectory does not pose a threat to the central bank’s inflation target.
“Wage growth in the services sector has been on a broad downward trajectory, having peaked at 9.5 per cent year-on-year (y-o-y) in the second quarter (2Q) of 2022 and has most recently fallen to around three per cent in 4Q 2023.
“The data further implies that services inflation, which accounts for more than 50 per cent of the basket, will stabilise around two per cent over the coming quarters, in line with our view for headline inflation to average at 2.0 per cent in 2024,” it shared.
Secondly, it said the ringgit has come under considerable pressure, having depreciated by 5.1 per cent against the US dollar in the past year.
“While it has made a gradual comeback in recent weeks, the ringgit’s year-to-date performance continues to lag other emerging market economies. We have been reiterating that the BNM will be wary of loosening monetary policy for fear of destabilising the currency as global monetary conditions remain tight.
“The central bank is aligned on this view and expects the global monetary policy stance ‘to remain tight’ in the short term. Nevertheless, with the US Federal Reserve likely to ease policy in June, yield differentials should gradually favour the ringgit over the coming months,” BMI said.
The research house viewed that not only BNM is prone to long periods of inaction but at three per cent, the policy rate is in line with pre-pandemic levels, suggesting that policy is not as tight as it is in other economies.
“Further, we forecast underlying price pressures to ease across 2024 and for it to average two per cent in 2024, down from 2.5 per cent in 2023.
“Our Oil and Gas team forecasts a five per cent increase in average crude oil prices in 2024, which is consistent with headline inflation falling well below two per cent. This suggests that inflation should not pose any concern for BNM for the remainder of this year,” it shared.
On another note, BMI said it expected Malaysia’s growth to remain robust in 2024.
It noted that the latest national accounts data showed the economy contracting by a seasonally-adjusted 2.1 per cent quarter-on-quarter (q-o-q) in 4Q 2023, which corresponded to a three per cent y-o-y growth rate.
“While this brings the full-year growth in 2023 to 3.7 per cent, it fell short of our forecast of 3.9 per cent.
“Looking ahead, with the economic outlook improving, we expect growth to accelerate to 4.4 per cent in 2024 and think the central bank would like to preserve policy space instead of acting in the event of a negative shock to the economy.”
However, it said the risks to its interest rate forecasts are skewed to the upside.
“The domestic inflation outlook still depends in large part on government plans around subsidies this year.
“A pullback would result in a renewed increase in price pressure. Meanwhile, should the ringgit face further depreciatory pressures, this could prompt the BNM to raise rates to maintain real interest rate differential vis-à-vis the United States,” it added.
