More OPR hikes anticipated following US's policy tightening

KUALA LUMPUR – Economists anticipate that Bank Negara Malaysia (BNM) is likely to increase the overnight policy rate (OPR) by at least another 25 basis points (bps) by the end of the year.

Bernama reports that economists from Kenanga Investment Bank Bhd and Hong Leong Investment Bank Bhd (HLIB) believe BNM is likely to to retain its hawkish stance and raise the OPR following the United States (US) Federal Reserve’s (Fed’s) 75-bps rate hike on July 27.

Kenanga stated in a recently published statement that it anticipates the OPR will hike by at least 25 bps during each of the central bank’s remaining two Monetary Policy Committee (MPC) meetings this year, scheduled for Sept. 7-8 and Nov. 2-3.

The statement said the Fed’s aggressive stance as well as the need to tame inflation signals that it would continue to hike interest rates sharply at the expense of economic growth.

As for Malaysia, the inflationary pressure is also rising and registering a hotter-than-anticipated 3.4% in June 2022 compared to 2.8% in May 2022, on account of pent-up demand and tourism-driven expenditure following the reopening of international borders and the elimination of COVID-19 limitations.

“Together with the expectation that gross domestic product growth is set to be driven by the stronger recovery of domestic demand, we anticipate BNM to continue its hawkish tilt and to increase the OPR by at least 25 bps during each of its two MPC meetings remaining for the year,” Kenanga explained.

Meanwhile, HLIB is also anticipating BNM to hike the OPR during the upcoming MPC meeting in September this year. If the hike happens, HLIB believes that the OPR would round out the year at 2.5%, a 25 bps increase from the current 2.25%.

“The reopening of international borders, the shift into COVID-19 endemic status, and the special Employees Provident Fund withdrawal plans are anticipated to boost Malaysia’s gross domestic product in the second quarter of 2022,” a supplementary note by HLIB stated.

Regarding the US, HLIB anticipates that the Fed will continue to raise interest rates in the near future, despite the fact that higher interest rates could fuel fears of an impending recession, given that industrial production declined slightly in June and real personal consumption expenditure also decreased slightly in May of this year.

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