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Bank Negara likely to buck Fed Reserve trend and keep OPR levels

Malaysia’s monetary policy will not be easily swayed by the US Federal Reserve’s action, economists said. NSTP/ASYRAF HAMZAH

KUALA LUMPUR: Malaysia's monetary policy will not be easily swayed by the US Federal Reserve's action, economists said.

The Fed's latest hint of a possible "small" hike in the US interest rate towards the end of the year does not entirely affect Bank Negara Malaysia's decision on its next cycle of rate consolidation, they said.

There are other factors weighing in the central bank's monetary policy decision, they added.

Bank Muamalat Malaysia Bhd chief economist and head of social finance Mohd Afzanizam Abdul Rashid despite Bank Negara's independent monetary policy decision, the Fed did play a role in setting the trend for the policy at global level.

Afzanizam added this was reflected by the 125 basis points hike in Bank Negara's overnight policy rate (OPR) since March last year.

He, however, reiterated that Bank Negara may not necessarily follow suit when the Fed suggested another 25 or 50 basis point increase by year-end.

"Monetary policy should be prescribed based on the domestic needs while the external economic condition would have an impact via trade and investment. Domestic conditions will continue to be its main focus when deciding the OPR," Afzanizam told the New Straits Times.

Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff feels that Bank Negara will only raise the OPR when inflation rate shows signs of increasing.

He said there are strong chances that Bank Negara wil keep the OPR at 3.00 per cent this year.

"Bank Negara will likely raise the OPR if the inflation starts to climb again. If the rate remains low, then most likely there will be no further hike on OPR," Ahmed Razman said.

Malaysian Institute of Economic Research economist Dr Shankaran Nambiar said to a large extent, Bank Negara's reaction will be based on the Fed's stance.

"There will of course be other factors that Bank Negara will take into consideration. This includes the state of China's economy, inflow of tourists, the weakening ringgit and inflation, even though the latter is perhaps less of a worry now."

Shankaran expects more rate hikes from Bank Negara, at least one before the year ends. This is mainly in response to the possible interest rate hikes from the Fed as well as to help restrain fund outflows.

"Foreign funds have been flowing out of Malaysia since April. It is quite clear that investors are looking for safe havens elsewhere. If there's a rate hike by the Fed, this outflow might be exacerbated," he added.

Shankaran also said inflation will not be the main factor that contributed to any rate hike. This is especially so since the inflation rate in Malaysia is moderating, having fallen from 3.8 per cent in December 2022 to 3.3 per cent in April 2023.

"The inflation numbers in the US are doing better, in the sense that they are moderating and that is the case for the consumer price index and producer price index.

"However, inflation is not out of the woods yet. It's just that the Fed wants to adopt a wait-and-see attitude. The possibility of rate hikes is very likely because the present 4.0 per cent inflation is far above the desired target of 2.0 per cent that the Fed is looking at," he added.


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