BNM may surprise market by either holding OPR or making ‘dovish’ hike: Maybank IB

KUALA LUMPUR – Maybank Investment Bank Bhd (Maybank IB) believes Bank Negara Malaysia (BNM) may surprise by either holding the Overnight Policy Rate (OPR) or making a “dovish hike” accompanied by explicit language to signal a pause ahead.

The investment bank said this is aimed at curbing the negative feedback loop.

“Another OPR hike in January could reinforce the upward spiral on the three-month Kuala Lumpur Interbank Offered Rate (3M Klibor), in our view, unless a compensating liquidity measure is announced,” it said in a note.

Maybank IB said if the OPR is kept at 2.75%, analysts expect the three-year Malaysian Government Securities yield to fall to 3.25-3.40%, barring any US rates selloff, and 3M Klibor to start easing gradually.

It said the market overwhelmingly expects BNM to raise the rate by 25 basis points, its fifth in a row, at the Monetary Policy Committee (MPC) meeting on Thursday.

“From a rates strategy perspective, we think investors may want to position for a surprise hold by BNM, considering that the market is already well-priced for additional hikes in OPR to around 3.25%.

“It is true that languages in the last MPC statement in November keep the door open for more hikes, but not without a caveat indicating that rate normalisation is not on any preset course,” Maybank IB said.

It said domestic growth is expected to slow considerably to 4.0% from an estimated 8.0% last year.

“Inflation is subject to volatility depending on the timing and extent of administrative price adjustments. Demand-pulled inflation requires monitoring, but may not necessarily sustain if the reopening effect begins to subside and policy tightening weighs.

“Considering the OPR has already reached 2.75% which we think is one to two hikes away from neutral-restrictive areas, BNM can afford to pause,” Maybank IB said.

It added that foreign exchange stability is not an issue currently.

Maybank IB said that a key matter to consider is the relentless rise in 3M Klibor which has persisted beyond end-2022.

“It was last fixed at 3.71%, giving an extremely wide 96-basis point spread over the OPR, which likely reflects a combination of hawkish rate outlook and interbank liquidity tightness,” it noted. – Bernama, January 18, 2023