KUALA LUMPUR: The overnight policy rate (OPR) hike shows optimism in Malaysia’s economic outlook, says MIDF Research.
The financial services provider said the higher OPR of 2.25% announced by Bank Negara Malaysia (BNM) today showed confidence in the country, driven by strengthening domestic demand and strong exports growth.
It said BNM foresees stronger growth momentum from the resumption of economic activity and a lower unemployment rate as more people enter the job market, resulting in a better income outlook.
“We believe the latest assessment indicates continued confidence that Malaysia’s macroeconomic condition will improve,” MIDF said in a note today.
It expects further policy normalisation would likely be carried out in the September 2022 MPC meeting with another 25bps hike.
MIDF said the rising trend in core inflation and stronger-than-expected domestic demand will drive BNM to raise the OPR by 50bps in the second half of the year to ensure sustainable recovery of Malaysia’s economy.
However, it said that the decision would be subject to the stability of economic growth, the pace of price increases and a 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 will avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness.
Bank Islam Malaysia Bhd also noted that the MPC members’ decision reflected the positive growth prospects of the economy. The adjustment in the monetary policy will be done on a gradual basis, the bank said.
OCBC Bank highlighted that while the latest headline inflation of 2.8% year-on-year (y-o-y) in May was indeed higher than the 2.7% that was expected, the pace of increase has been less concerning than in other countries.
“To be sure, there are obvious areas that deserve a close watch. These include food prices that have accelerated to 5.2% y-o-y, driven by items such as chicken prices, which climbed 13.4% y-o-y,” said OCBC economist Wellian Wiranto.
Maybank Investment Bank chief economist Suhaimi Ilias said the investment bank is maintaining its view of a total of 75bps this year to 2.5%, and another 50bps hike next year to 3%.
The investment bank recently estimated a 100bps increase in the OPR for the period between the second half of 2022 and the first half of next year.