KUALA LUMPUR – The Overnight Policy Rate (OPR) has been increased to 2.25% following Bank Negara Malaysia’s (BNM) fourth Monetary Policy Committee (MPC) meeting held on July 6.
The central bank announced in its Monetary Policy Statement that the ceiling and floor rates of the OPR corridor have been raised to 2.5% and 2.0% respectively, an increase of 25 basis points (bps).
BNM said the MPC had agreed to hike the OPR “amid the positive growth prospects for Malaysia’s economy.”
This is in line with the MPC’s view that the previous unprecedented conditions that necessitated a historically low OPR rate have continued to recede.
The statement said at the current OPR level, the monetary policy stance is still accommodative and supportive of Malaysia’s economic growth.
However, the MPC said that they would continue to assess the evolving conditions and the impact on the overall outlook to domestic inflation and growth.
It added that any sort of adjustments to the monetary policy settings would be made in a measured and gradual manner, to ensure that monetary policy remains accommodative to promote sustainable economic growth in a price-stable environment.
Economic activities bolstered by global economy reopening
Additionally, BNM states that the reopening of global economies and signs of the labour market conditions improving are both supporting the recovery of economic activities.
Despite that, growth has been partially offset by the impact of mounting cost constraints, the Russia-Ukraine war, and China’s strict COVID-19 containment measures.
Furthermore, inflationary pressures have continued to rise mostly due to the rising commodity prices and strong demands, even though there are modest improvements in the global supply chain conditions, it explained.
Due to the inflation, central banks around the world are expected to continue reviewing their monetary policy settings with some doing so at a faster rate.
Future global growth is anticipated to slow and will continue to be affected by the higher cost pressures, geopolitical situations, conditions of the global supply chain, and the financial market volatility.
“Malaysia’s economic activities have continued to strengthen in recent months with exports and retail spending indicators affirming the positive growth momentum, further supported by the country’s transition into endemicity.
“As for the labour market, the rate of unemployment has shown a further decline with higher labour participation while income prospects have improved.
“Although the external demand is anticipated to weaken due to global growth headwinds, economic growth will still be supported by strong domestic demand,” BNM explained.
Furthermore, the international borders reopening since April 1 this year would aid the recovery of tourism-related sectors.
Apart from that, investment activities and prospects continue to be bolstered by the realisation of multi-year projects. But there are downside risks to growth which are brought on by the weaker-than-anticipated global growth, further escalation of geopolitical conflicts, and deteriorating global supply chain disruptions.
Headline inflation forecast at between 2.2% to 3.2%
On the topic of inflation, BNM stated that headline inflation averaged at 2.4% year-to-date.
Although the range of inflation for 2022 is expected to remain within 2.2% to 3.2%, there may be certain months where headline inflation could be higher mainly due to the base effect of electricity prices.
The underlying inflation average, measured by core inflation, is projected around the range of 2% to 3% this year given increased demands despite the high-cost environment.
BNM said that the existing price controls, fuel subsidies, and the continued space capacity in the economy will continue to limit the extent of inflationary pressures.
The outlook for inflation continues to be subjected to global commodity price development. These are mainly affected by the ongoing military conflict in Ukraine, the extended supply disruptions, and also domestic policy actions.
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