The central bank’s 2022 annual report provides an insight into the decision-making behind the hikes in the overnight policy rate (OPR), which were far less aggressive than the hikes undertaken by the US Federal Reserve.
As the Malaysian economy was on a firmer footing post the pandemic lockdowns, the monetary policy committee (MPC) deemed that 2022 was the right time to begin withdrawing excess monetary policy support.
The MPC gradually increased the OPR through four 25 basis points adjustments at the May, July, September and November meetings.
This resulted in a total increase of 100 basis points, bringing the OPR to 2.75% from a historical low of 1.75% in 2020 during the midst of the Covid-19 pandemic.
It has since maintained the OPR at 2.75% at its last meetings in January and March of 2023.
After the series of adjustments, headline inflation averaged at 3.3% for the whole of 2022.
“In early 2022, domestic inflation was mainly driven by costs. However, as the year progressed and the economy recovered, the MPC observed some signs of demand-driven inflation,” it said.
As such, the OPR increases aimed at “pre-emptively mitigating the potential risk of excessive demand pushing up prices further”. This was necessary to avoid excessive broad based price pressures and unanchored inflation expectations.
“If the MPC had waited until high inflation became out of control before taking action, the OPR might need to be raised faster and by a larger amount,” it said.
This would also have left the lower income group particularly exposed to the effects of inflation, and the erosion of their purchasing power and savings.
Together, BNM opines that it would have been far more damaging to the economy than higher interest rates.
“Throughout this period, the bank’s (BNM) monetary operations focused on ensuring sufficient liquidity in the banking system, including after the expiry of the Statutory Reserve Ratio (SRR) flexibility on Dec 31, 2022,” it added.
Liquidity is critical for orderly functioning of domestic financial markets and financial intermediation in the economy.
For borrowers, the impact of OPR increases on loan repayments depends on the type of loan.
Fixed-rate loans, which account for around 50% of total household loans, were unaffected by hikes in the OPR, whilst floating-rate loans would have seen higher monthly instalments.
Looking ahead
After experiencing strong growth in real gross domestic product (GDP) of 8.7% last year, BNM expects the economy to face several headwinds from global developments.
“Amid these challenges, BNM remains committed to ensuring price stability in support of sustainable domestic economic growth,” it said.
This would involve normalisation of monetary policy accommodation, informed by evolving conditions and implications to domestic inflation or growth.
Liquidity in the foreign exchange, money and government bond markets remains a priority of the central bank.
“Now that the worst of the pandemic crisis is behind us, we must focus on restoring our economic strength and foundation to prepare for any future shocks,” said BNM.
As a result, there will be a shift in focus to rebuilding the depleted buffers of households and businesses through improving social protection coverage, as well as encouraging savings, BNM stressed.