KUALA LUMPUR – MIDF Research believes Bank Negara Malaysia (BNM) will consider another 25 basis points (bps) rate hike in the second half of 2023 (H2 2023) following the stronger-than-expected domestic economy.
It noted that the current focus of BNM’s monetary policy setting is to ensure a sustainable growth momentum and the domestic economy continues to surprise market expectations.
Among them are the distributive trade sales performances, tight job market and sticky core inflation.
MIDF said in a note today that BNM may optimise its monetary arms through normalising its statutory reserve requirement (SRR) from 2.00% to 3.00% this year.
“The SRR rate was reduced to 2.00% in March 2020.
“However, the decision will be subjected to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.
“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook by way of a persistently high inflation and a further rise in household indebtedness,” the research firm said.
Meanwhile, commenting on BNM’s decision to keep the OPR status quo at 3.0% today, MIDF said the move was in line with market expectations.
BNM highlighted in a statement that the global economy remains firm, underpinned by resilient domestic demand amid strong labour market conditions.
Although China’s reopening is expected to spur global growth, the macro momentum in the second largest economy has slowed, with the global economy facing many downside risks, among them include elevated cost pressures and higher interest rates, said BNM.
The central bank also said that central banks across the globe are still embarking on contractionary monetary policy as core inflation has remained elevated.
“As such, we do not discount the possibility of another 25 bps rate hike in 2H 2023 given that domestic economic figures point towards an upbeat momentum,” MIDF pointed.
As for ringgit, MIDF said that fundamentally, the local currency is in a good position as the domestic economy remains on an upbeat momentum.
As a net exporter of crude petroleum, liquefied natural gas and palm oil, Malaysia stands to benefit from the elevated global commodity prices.
However, it said the ringgit will continue to depreciate as the US Federal Reserve keeps on delaying its interest rate pause.
MIDF said China’s weaker-than-expected performances have indirectly affected the local currency given that exports to China is 13.2% of total exports, which fell by 8.8% year-on-year in the first five months of 2023. – Bernama, July 6, 2023
