KUALA LUMPUR: Bank Negara’s Monetary Policy Committee (MPC) has raised its overnight policy rate (OPR) by 25 basis points (bps) to 2.75%, in line with expectations.
This is MPC’s fourth consecutive OPR hike.
All but two of 27 economists in the Oct. 25-31 poll predicted BNM would hike its overnight policy rate by 25 basis points to 2.75% from 2.50% at its Nov. 3 meeting.
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“The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.00% and 2.50%, respectively,” Bank Negara said in a statement.
The central bank said the global economy continues to be weighed down by rising cost pressures, tighter global financial conditions, and strict containment measures in China.
These factors more than offset the support from positive labour market conditions and the full reopening of most economies and international borders.
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.
Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures.
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“In particular, continued aggressive adjustments in US interest rates and expectations of a higher terminal rate in the US, have contributed to a persistently strong US dollar environment
“This has resulted in higher volatility in financial markets, affecting other major and emerging market currencies, including the ringgit.
“Going forward, the global growth outlook will continue to face headwinds from tighter financial conditions amid elevated inflation in major economies and the domestic challenges in China,” Bank Negara said.
It added that the growth outlook remained subject to downside risks, including escalation of geopolitical tensions, worsening of domestic headwinds in China and potential energy rationing in Europe.
“For the Malaysian economy, latest indicators show that economic activity strengthened further in the third quarter, driven primarily by robust domestic demand.
“Going forward, despite the challenging global environment, domestic demand will remain the key driver of growth. Household spending will continue to be underpinned by improvements in labour market conditions and income prospects,” it said.
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Bank Negara said despite bouts of heightened volatility in the global financial and foreign exchange markets, these developments are not expected to derail Malaysia's growth.
“Domestic liquidity remains sufficient, with continued orderly functioning of the financial and foreign exchange markets. Financial institutions also continue to operate with strong capital and liquidity buffers. These will ensure financial intermediation remains supportive of the economy.
Downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies, further escalation of geopolitical conflicts, and worsening supply chain disruptions,” the central bank said.
On inflation, Bank Negara said headline inflation is likely to have peaked in 3Q22and is expected to moderate thereafter, albeit remaining elevated.
“Underlying inflation, as measured by core inflation, is projected to average closer to the upper end of the 2.0% -3.0% forecast range in 2022, having averaged2.7% year-to-date, given some demand-driven price pressure amid the high-cost environment.
“Moving into 2023, headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as any changes in domestic policy measures. The extent of upward pressures to inflation will remain partly contained by existing price controls, subsidies, and the remaining spare capacity in the economy,” it said.
It added that the balance of risk to the inflation outlook in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions
“Against the backdrop of continued positive growth prospects for the Malaysian economy, the MPC decided to further adjust the degree of monetary accommodation. The adjustment would also pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth.
“At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth. The MPC is not on any pre-set course, which means that monetary policy decisions will continue to depend on evolving conditions and their implications on the overall outlook to domestic inflation and growth.
“Any adjustments to the monetary policy settings going forward would continue to be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability,” Bank Negara said.
