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BMI expects OPR to stay at 3% until 2024 amid easing inflation, slow economic growth

KUALA LUMPUR (Sept 14): Taking the same stance as most economist, BMI, a Fitch Solutions company, expects Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) on hold at 3% for the rest of the year and through the end of 2024.
The projection was driven by the ease of headline inflation year on year (y-o-y)  to 2% in July 2023, from 2.8% in May 2023, BMI said in a note on Wednesday (Sept 13).
“The improved inflationary backdrop implies that Malaysia’s real policy rate is now in positive territory, which since 2006 has typically coincided with the end of the tightening cycle.
“As such, we believe that the current policy stance is sufficient to keep inflation in check and that the central bank will remain on hold for now,” BMI said.
Following the faster-than-expected easing of prices, BMI has prompted to lower its inflation forecast to 1.8% (from 2% previously) for the end of 2023.
“Accordingly, we have adjusted our forecast for inflation to average 2.6% in 2023 from 2.7% previously, which marks a significant slowdown from 3.4% in 2022,” it said.
BMI’s OPR projection is also weighing on the ringgit, which has weakened by 5.9% against the US dollar year-to-date, positioning it to be one of the weakest currencies in the region.
“A swift return to monetary loosening will therefore run the risk of exacerbating further downside pressure on the ringgit, at a time when global monetary conditions remain restrictive,” it said.
However, BMI also expects that BNM will raise OPR further if the ringgit faces further depreciatory pressure, in order to maintain real interest rate differential vis-à-vis the US.
BMI also sees that there is a less dire need for BNM to cut rates too soon, as the central bank’s cumulative 125 basis point (bps) hike has been relatively modest compared to the regional peers.
“We believe base effects will remain favourable, and for underlying price pressures to ease amid a weakening economy,” it noted.
Meanwhile, amid the Malaysian economic slowdown through 2023, BMI said this further implies that BNM will take a backseat in tiding the slowdown.
According to the firm, Malaysia’s economy has slowed down to 2.9% in the second quarter of 2023 (2Q2023) from 5.6% in 1Q2023). This is the slowest pace since 3Q2021.
“While we expect growth to pick up in the second half of 2023 (2H2023), our prevailing forecast for Malaysia’s real gross domestic product (GDP) growth of 4% in 2023 sits at the lower end of the central bank’s 4%-5% target, and falls short of the pre-pandemic average (2015-2019) of 4.9%,” it noted.
The firm noted that BNM’s anticipated stronger-than-expected recovery in the electrical and electronic (E&E) sector’s downturn will bode well for the economy.
“If sustained, a rebound in Malaysia’s export-oriented economy will reduce the pressure for the central bank to cut rates,” it said.
However, BMI also expects that BNM will raise the OPR further to maintain real interest rate differential vis-à-vis the US, if the ringgit faces further depreciatory pressure.
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Source: EdgeProp.my

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