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Malaysia Monetary Policy May 2023

Malaysia: Bank Negara Malaysia delivers surprise hike in May

At its 2–3 May meeting, the Monetary Policy Committee of Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points to 3.00% after pausing its tightening cycle at the previous two meetings. The decision—which brought the OPR back to pre-pandemic levels—caught markets by surprise, as a third consecutive hold had been priced in.

The Bank resumed its tightening cycle due to concerns over the impact of still-resilient domestic demand on inflation. According to the BNM, the domestic economy showed no signs of losing momentum despite previous interest rate increases. Consumption and investment in particular were deemed unaffected by excessive tightening, underpinned by a stronger labor market, a recovery in the tourism sector and multi-year infrastructure projects. Accordingly, the Bank saw core inflation remaining elevated and highly dependent on government price controls and energy subsidies. To prevent inflation from rising further and counteract potential financial imbalances, the BNM opted for the quarter point rise.

The Bank’s forward guidance was scarce, with the press release only noting that the BNM “will continue to ensure that the monetary policy stance remains consistent with the outlook of domestic inflation and growth”. In light of the surprise decision, our panelists are currently revising their forecasts for the overnight policy rate over the course of 2023.

Looking ahead, Euben Paracuelles and Rangga Cipta, analysts at Nomura, consider the tightening cycle to have ended:

“We forecast BNM will leave its policy rate unchanged at 3% for the rest of the year. We still believe the growth outlook is deteriorating and will disappoint official forecasts, supporting the case for BNM to stay on-hold. We continue to expect GDP growth to slow sharply to 4.2% this year from 8.7% in 2022 (below BNM’s 4.4%), led by declining export growth, which we think will have quick negative spillover effects for domestic demand via falling wage growth and softening labor markets.”

Meanwhile, analysts at the EIU expect the BNM to lower rates by the end of 2023:

“We believe that a prolonged bout of disinflation over the course of this year will allow the central bank to pursue a neutral policy stance until at least the fourth quarter. A bout of disinflation, coupled with an anticipated slowdown in economic activity, will increase pressure on BNM to relax policy in a bid to stimulate growth. As has been the case in recent years, changes to the OPR will be incremental. After an anticipated reduction of 25 basis points in the fourth quarter, we expect BNM to leave the OPR unchanged at 2.75% throughout 2024.”

The next monetary policy meeting is scheduled for 5–6 July.

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