PETALING JAYA: Amid the easing of inflation, experts are expecting Bank Negara to maintain its current pause on overnight policy rate (OPR) hikes at the next Monetary Policy Committee (MPC) meeting to sustain and bolster economic growth.
With the inflation dynamic different in Malaysia compared with the United States, the fear of slowing growth has economists holding a bias that the rate cycle here may have peaked with policy makers likely to sustain the economic growth momentum post Covid-19.
The MPC is set to meet for its third out of six meetings next Tuesday and Wednesday.
Malaysia University of Science and Technology economics prof Geoffrey Williams recommended the central bank hold the OPR at 2.75%, which is the normal or equilibrium rate.
Williams said the rate is the key to promoting a stable economy and fostering sustainable growth, especially given the country’s stable financial sector.
“Bank Negara has a clear mandate to maintain price stability, ensure financial stability and support sustainable economic growth. It is doing a great job at this,” he said, in an email to StarBiz.
On this backdrop, Williams pointed out that the central bank’s recent stress tests indicated the financial sector is stable, and the last set of interest rate hikes did not cause significant pain.
Bank Negara had released its Financial Stability Review report for the second half of 2022 recently, which stated that the latest solvency stress test exercises showed that banks are capable of withstanding significant macroeconomic and financial shocks.
It added the tests reaffirmed the resilience of financial institutions, which are well-positioned to continue lending to both businesses and households, even under severe simulated shocks.
Williams is confident that the economy is headed towards sustainable growth, barring any major external shocks.
He acknowledged that while global economic factors could pose a risk to the economy, they have only an indirect impact on the OPR.
“Bank Negara does not follow the US Federal Reserve (Fed) nor does it change the OPR to control the exchange rate. Anyway, US inflation is falling sharply and therefore, it is less likely that US rates will rise,” he added.
The market is expecting the Fed to hike its policy rate by another 25 basis points (bps) at its meeting next week and then pause, with some investors have already pricing-in a pivot by the Fed in the later part of the year as the American economy goes into recession.
Bank Islam Malaysia Bhd chief economist Firdaos Rosli said the global growth moderation and sluggish recovery of the local labour market would remain as the key themes in determining the near-term policy rate direction.
“Much of the latter is due to the tightening of foreign labour hiring, coupled with the ongoing investigations into the recruitment of foreign workers in Malaysia,” said Firdaos, who expects the central bank to hold the OPR at 2.75% in the upcoming MPC meeting.The country is seeing early positive signs of China’s full economic recovery, but its impact to the economy is muted compared with other neighbouring countries including Thailand and Vietnam, according to Firdoas.
He noted the absence of direct flights between Malaysia and second-tier Chinese cities could be a contributing factor in limiting the flow of goods and people between the two nations, thus dampening the impact of China’s economic recovery on Malaysia.
China has been the country’s largest trading partner for the past 14 consecutive years and any changes in the Chinese economy can have a ripple effect on its economy. In 2022, China and Malaysia bilateral trade achieved a record high of US$203.6bil (RM903.48bil).
SPI Asset Management managing director Stephen Innes has a divergent view and expects the central bank to announce another interest rate hike in May due to the stickiness of core inflation.
However, if the Fed signals an end to its hiking cycle, Bank Negara may take a pause to provide support for the economy.
“With inflation easing, the main focus will be on gross domestic product (GDP) and growth expectations, as it is important to stabilise consumer confidence first and foremost,” Innes said.
Williams expects the markets to respond positively if MPC shows consistent policy and the stance is predictable.
“As for Bursa Malaysia, its performance has very little to do with the OPR and more to do with management of listed companies. The OPR cannot be of help,” he said.
Firdaos said Bursa Malaysia would likely trend sideways as investors remained in a cautious trading mode.
“Although there are nascent signs of recovery in recent weeks, the local market is down 4% on a year-to-date basis and it would take a while to recover amid moderating growth,” he noted.
On fund flows, Firdaos opined the Malaysian bond market is likely to attract interest due to the increased demand for safe-haven assets.
Innes said any further hike in the OPR would likely be the last one and could provide support for Bursa Malaysia given the current concerns around a potential US recession.
Reactions from investors have been mixed due to factors such as the slow recovery of the China consumer market and issues related to US banking turmoil.
During its meeting in January and March, the MPC had decided to maintain the OPR at 2.75% despite expectations of another 25 bps hike.
In 2022, the OPR was raised four times in May, July, September and November by 25bps each time, bringing it to 2.75% from the initial level of 1.75%.
The rate cycles are, however, on different paths between economies in the East and West.
In a recent report Bridgewater Associates LP stated that economies and markets are not in a state of equilibrium with markets in the West being far from equilibrium while those in the East are closer to it.
It added there are three major equilibriums and two policy levers that interact to drive markets and economies.
These equilibriums are defined as spending and output in line with capacity, debt growth in line with income growth, and a normal level of risk premiums in assets relative to cash.
The investment management firm, founded by billionaire Ray Dalio, suggested that to achieve equilibrium conditions, it is necessary to have 2% real growth with 2% inflation, between 4% and 5% nominal spending growth, and an unemployment rate that is around average.
Its report highlighted credit growth should not be too high or too low, and interest rates should not act as a major incentive or disincentive to borrow.
Finally, it noted that bonds should provide an expected return above cash, and equities should provide an expected return above bonds, commensurate with the risks of those assets.
“If these conditions don’t exist, intolerable circumstances will ensue that will drive changes toward these equilibriums being reached,” the firm said in its report titled “The tightening cycle is beginning to bite”.
The report presents several indicators of equilibrium conditions and illustrates how the United States, Europe, and the UK have deviated from these conditions.
“On the margin, the nature of the disequilibrium has shifted from too much inflation to not enough growth, with the risk premiums on assets falling relative to cash,” it added.
The firm favoured assets in relation to cash in Japan, China and much of Asia because the economies are either closer to equilibrium or are in disequilibriums that favour an expansion of liquidity that makes cash unattractive in relation to assets.
Given the next stage of the cycle, a weakening of the US economy, Bridgewater added, US assets will become less attractive, particularly if the Fed pauses or eases while Asian economies recover and the European Central Bank continues to tighten monetary policy to catch up.
“So, the dollar is vulnerable as relative conditions and policies reverse,” it noted.
