BNM said the OPR hike, which increases the cost of borrowing, was needed to control inflationary pressures amid the country’s strengthening economy.
In May, the central bank raised the OPR to 2% from 1.75%, reportedly the lowest on record, following a 25bps cut in July 2020. It raised the OPR by another 25bps to 2.25% in July and hiked it up by another 25bps to 2.5% in September.
In a statement issued today, BNM said that inflationary pressures were “more persistent than expected” due to strong demand, tight labour markets, and elevated commodity prices, despite improvements in global supply chain conditions.
BNM said the adjustment would also pre-emptively manage the risk of excessive demand on price pressures.
It said rising cost pressures, tighter global financial conditions and strict containment measures in China had more than offset the support from positive labour market conditions and the full reopening of economies and international borders.
“Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures,” the central bank added.
The US Federal Reserve (Fed) announced a 75bps increase late yesterday. The Bank of England is also expected to raise its lending rate by the same margin, the highest quantum since 1989. A week ago, the European Central Bank also raised its rate by 0.75%.
BNM said the continued aggressive adjustments in US interest rates and expectations of a higher terminal rate in the US had contributed to a persistently strong US dollar environment and higher volatility in the financial markets, thus affecting major currencies in other major and emerging markets, including the ringgit.
The ringgit has been trailing the US dollar for more than a week now. It opened at RM4.74 to the dollar this morning, close to the lowest level seen since the Asian financial crisis of 1998.
Going forward, BNM also expects the global growth outlook to continue facing headwinds from tighter financial conditions as inflation in major economies rise and domestic challenges in China persist.
It said the latest indicators showed that economic activity in Malaysia had strengthened further in the third quarter, driven primarily by robust domestic demand, which would remain the key driver of growth in the face of a challenging global environment.
BNM said that improvements in labour market conditions and income prospects would be a boost for household spending, while rising tourist arrivals would lift tourism-related sectors.
The central bank said that in line with earlier assessments, inflation was likely to have peaked in the third quarter this year (Q3 2022) and was now expected to moderate going forward.
“Underlying inflation, as measured by core inflation, is projected to average closer to the upper end of the 2% to 3% forecast range for 2022. The average inflation rate so far this year is 2.7% due to some demand-driven price pressures amid a high-cost environment,” it said.
Inflation is expected to remain elevated in 2023.
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