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Despite easing inflation, no sign yet on change in OPR

While inflation has moderated in recent months, there is no guarantee of a more accommodative monetary policy.

Bank Negara Malaysia has yet to show any sign that it will raise the OPR at its next monetary policy committee meeting in September.

PETALING JAYA: The verdict is still out on whether or not Bank Negara Malaysia (BNM) will raise the overnight policy rate (OPR) despite moderating inflation in recent months.

Two economists expect the central bank to maintain the OPR at 3% in the near-term, but a market research outfit does not discount the possibility that BNM will raise the interest rate at its next monetary policy committee meeting on Sept 6 and 7.

Malaysia’s consumer price index eased to 2.4% year-on-year (y-o-y) in June, the lowest reading in the first six months of 2023. Meanwhile, core inflation dropped to 3.1% y-o-y from 3.5% in the previous month.

A moderation in price levels typically correlates with a more accommodative monetary policy.

However, MIDF Research said in its economic brief published last Tuesday the resilient and robust domestic demand could lead to a rise in interest rate.

It based its findings on the 2.7% y-o-y increase in the services producer price index (SPPI) to 114.9 points in the second quarter of 2023 (Q2 2023).

SPPI measures how demand levels exert upward price pressure on local service providers.

Head of MIDF Research Imran Yusof explained that the main argument for a possible OPR hike is the current strength of domestic demand.

“The recent rate of SPPI inflation, albeit lower than previous quarters, is still at high levels vis-a-vis pre-pandemic average,” he said.

“With core consumer price index (CPI) remaining above headline inflation, we view this as a signal for strong demand pressures on general prices.”

He argued that the OPR would likely be maintained if demand-driven price pressures were fully contained.

“However, in our opinion, BNM may consider a proactive approach to carry out another OPR hike to ensure the inflation expectation will be anchored.

“It is our view that the hike may be necessary if future data suggests inflation is stickier than anticipated and remains elevated. Inflation could be elevated if domestic demand remains strong,” he said.

No urgency for OPR hike

Malaysian Institute of Economic Research (MIER) economist Shankaran Nambiar expects BNM to maintain the OPR at 3%, citing promising domestic macroeconomic indicators.

“Inflation has been moderating and although core inflation could drop further, headline inflation has been tamed. The employment numbers are also looking good,” he told FMT Business.

However, he conceded that external events in the US may influence the OPR’s movement next month.

“By most counts the US Federal Reserve (Fed) is not likely to go in for a rate hike in September,” he said.

Shankaran said while inflation in the US has come under control, it has still not come within the 2% target. Hence, there is a possibility the Fed will push for another interest rate hike.

“Should that happen, there is a likelihood that BNM will raise the OPR. On balance, however, I think BNM will maintain the rate and keep monitoring developments,” he said.

Bank Muamalat Malaysia Bhd chief economist Afzanizam Rashid said the signs of a weakening global economy would likely keep the OPR at 3% for the rest of the year.

“We could see this from the decline in the purchasing managers’ index, which has remained below the 50-point demarcation line for 11 months in a row,” he told FMT Business.

“Anything below 50 points indicates that businesses, especially those in the manufacturing sector, are generally pessimistic about the future outlook.”

Malaysia’s total exports and imports declined by 11.1% and 11.5% during the second quarter of 2023.

Afzanizam also pointed out that the OPR has already been within its normal trajectory of between 3% and 3.25% when the economy was growing between 4.4% and 6% from 2011 to 2019.

“Therefore, there is no urgency for BNM to raise the OPR further,” he said.


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