Bank Negara Malaysia (BNM) will tighten the overnight policy rate (OPR) by a quarter-point for the fourth time in a row on Thursday (Nov 3) as upside risk to inflation persists and to support a weakening ringgit, a Reuters poll showed.

The central bank started raising rates in May, even though inflation was within its target range of 2% to 3%. It has since hiked rates by 75 basis points to keep inflation in check.

In September, inflation fell marginally to 4.5%, from 4.7% in August, but robust domestic demand and an accommodative budget pose a risk, and economists said all-time high core inflation in September indicated that it was sticky.

All but two of 27 economists in the Oct 25 to 31 poll predicted that BNM would hike the OPR by 25 basis points to 2.75%, from 2.50%, in the meeting on Thursday.

“The direction of fiscal policy measures in 2023 is still unclear,” noted Sanjay Mathur, ANZ’s chief economist in Southeast Asia and India.

“Besides, the odds of the US Federal Reserve delivering another 75-basis-point hike in November have also risen. This does not bode well for the ringgit, especially when international reserves are also on a steady path of decline.”

The local currency has fallen around 12% this year.

Two economists at Barclays and UOB respectively expect BNM to pause in the meeting, given a weakening global outlook, and to assess the effect of cumulative hikes.

Nearly 90% of economists forecast that BNM will raise the OPR in the first quarter of 2023 (1Q2023), including the two economists calling for a pause in November, giving a median forecast of 3%.

While 13 of 18 pencilled in a 25-basis-point hike in 1Q2023, three said 50 basis points. Two economists predicted no move.

The median forecast showed that the OPR would remain at 3% until at least the end of next year. However, beyond 1Q2023, seven economists expect rates to go up at some point in 2023.

“As core inflation gains momentum, we continue to expect BNM to hike policy rates in consecutive meetings (25 basis points per meeting) through the first half of next year, bringing the OPR up to 3.5%, from 2.5% currently,” analysts at Goldman Sachs said.

“The evolution of subsidy policy after the election remains a key risk. A faster shift to targeted fuel subsidies may imply higher inflation pressures, and more hawkish BNM policy outcomes than in our baseline forecasts.”

The Malaysian economy grew by 8.9% in 2Q2022, its fastest expansion in a year, mostly driven by domestic demand and resilient exports, although the momentum is unlikely to be sustained.

“Economic growth is likely to weaken considerably over the coming quarters, as the boost from the reopening fades, and weaker external demand drags on exports,” Gareth Leather, a senior Asian economist at Capital Economics, said.

Source: TheEdgeMarkets.com