Malaysia’s Monetary Policy January 2023

At its January 18-19 meeting, the Monetary Policy Committee of Bank Negara Malaysia (BNM) kept the overnight policy rate (OPR) unchanged at 2.75%, defying market expectations for another 25 basis point increase. The January decision marks the first pause for hiking after a cumulative 100 basis point increase over the past four meetings.

The bank’s decision was based on the need to assess the impact of previous policy adjustments, given their lagging effects on the economy and inflation. However, with inflation peaking in the third quarter of 2022, concerns about economic growth likely took precedence over cooling inflation and prompted the Bank to halt the rising cycle earlier than expected. The economy is expected to slow this year, with household spending remaining the main driver of growth. Meanwhile, the appreciable drop in export growth in the fourth quarter hinted at an impending global downturn, likely driving protectionism: a deteriorating external sector could dampen domestic demand by raising unemployment and curbing wage growth. To protect the economy from these potential downside risks, the NBB has kept the OPR at an accommodative level.

The bank stated in its statement that it “will continue to calibrate monetary policy settings that balance the risks of domestic inflation and sustainable growth.” As a result, the National Bank of Finance will continue to walk a fine line between taming inflation and supporting economic growth amid a highly volatile external landscape. The consensus among FocusEconomics panelists is around 50 basis points for additional monetary policy tightening this year.

Regarding the future, Dipalika Sarkar and Jennifer Kusuma, economists at ANZ commented:

In our view, the government’s decision on fuel subsidies will continue to be a major factor in future central bank policy decisions. But we are unlikely to see that before the new budget is revealed in late February. Our current forecast for the final interest rate stands at 3.50%, but today’s BNM decision opened up downside risks.

In contrast, Euben Paracuelles and Rangga Cipta, analysts at Nomura, do indeed see the hiking cycle as over:

“We maintain our view that BNM has already reached the end of the hiking cycle with a final rate at 2.75%. In the near term, we think the next MPC meeting in March will be a pause again simply because it takes time for the BNM target mentioned today to assess The impact of previous interest rate increases. Furthermore, growth and inflation are likely to continue to decline materially based on our projections, which indicates that BNM will remain on hold for a longer period.”

The next meeting of the Malaysian National Office is scheduled for March 8-9.

Our committee expects the overnight interest rate policy to end in 2023 at 3.16%, and 2024 at 3.00%.

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