Economists expect OPR to remain at 3% for the rest of 2024
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KUALA LUMPUR (Jan 24): Following Bank Negara Malaysia’s (BNM) decision to maintain the Overnight Policy Rate (OPR) at 3% on Wednesday, economists project the key rate will be kept intact for the rest of the year.
MIDF Research said from a medium-term perspective, policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness.
As the external environment is expected to stay challenging in 2024, and the core inflation rate foreseen to stabilise, MIDF Research said these factors may influence BNM to keep the OPR at current levels throughout 2024.
“The decision will be subject to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand,” it said in an economic review note on Wednesday.
After its first Monetary Policy Committee (MPC) meeting of the year on Wednesday, BNM announced the OPR would remain unchanged at 3%, a decision that was widely expected and correctly predicted by all 28 economists polled by Reuters.
The central bank said that the current OPR level remains supportive of the economy and is consistent with its assessment of inflation and growth prospects.
This is the fourth time that the MPC has decided to maintain the OPR at 3% since July 2023. The headline rate was last raised by 25 basis points in May 2023.
According to BNM, the OPR was at the highest at 3.5% in April 2006, and at the lowest at 1.75% from July 2020 until May 2022 to support the economy during the Covid-19 pandemic.
Keeping to its forecast of an unchanged OPR, OCBC Global Markets Research said it is cautiously optimistic on domestic growth prospects and expects inflation to be manageable.
The research firm concurred with BNM’s view that Malaysia’s economic growth in 2024 will improve driven by household spending, tourism and broad-based investment activities.
But it pointed out that the inflation outlook remains less certain, as the main unknown is domestic policy changes.
“To that end, we believe that the timing and mechanism with regards to the implementation of targeted fuel subsidies will be crucial to watch going forward,” OCBC said.
Inflation to be a key concern for BNM
Similarly, London-based economic research firm Capital Economics pointed out that inflation will be a key concern for the central bank in the coming months.
While core inflation remains subdued, it sees headline inflation likely to rise sharply this year to a peak of 3.7%, on the back of cuts to food and energy subsidies and a hike in the sales and services tax from 6% to 8%.
“With inflation likely to jump, there is a case for the central bank to tighten policy…but the rise in inflation will also hit real incomes and further weaken demand at a time when the economy is already under pressure. The advance estimate for 4Q GDP, released last week, showed that the economy contracted by 1.7% quarter-on-quarter.
“We think the central bank will look past the jump in headline inflation and hold fire if, as we expect, the economy remains weak and core inflation subdued,” Capital Economics said.
“The upshot is that interest rates are likely to remain on hold until the end of this year and throughout 2024. Based on our forecasts, this would make Bank Negara Malaysia the only central bank in Emerging Asia not to cut interest rates this year,” the research firm added.
UOB Global Economics & Markets Research said the neutral signal by the MPC reinforced its view of a prolonged interest rate pause by BNM at 3% throughout the year.
“Our OPR call is also backed by in-house assumptions of a soft landing in the global economy, [the US] Fed rate cuts starting mid-2024 and gradual subsidy rationalisation by the Unity Government,” it said.
UOB said that its forecast is consistent with BNM’s acknowledgement of the peak of global interest rates and the central bank’s expectations of stable cost and demand conditions domestically.
“Moreover, the continuation of steady OPR will help to narrow the negative gap with US interest rates and support the ringgit recovery by year-end,” UOB added.
The next MPC meeting is scheduled to be held on March 6 and 7.
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Source: EdgeProp.my
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