Lee: The Public and Fiscal Responsibility Act as well as the Government Procurement Act will serve as important tools to ensure fiscal discipline.
PETALING JAYA: Tweaking the overnight policy rate (OPR) could hurt the economy and the ringgit, economists cautioned, as Bank Negara officials are set to meet next week for this year’s final Monetary Policy Committee (MPC) meeting.
The best move is to retain the benchmark interest rate at 3%, even as the country’s headline inflation has cooled to the lowest level in two and a half years, said economist Manokaran Mottain.
“If Bank Negara lowers the OPR to below 3%, it will widen the spread between the OPR and the United States’ federal funds rate (FFR).
“This would accelerate fund outflow and in turn jeopardise the ringgit’s exchange rate against the US dollar.
“Increasing the OPR at the moment is also out of the question, considering the domestic economic conditions, and would affect Malaysians, who are already burdened with high cost of living,” he told StarBiz.
The MPC meeting is scheduled to be held from Nov 1 to 2.
Socio Economic Research Centre (SERC) executive director Lee Heng Guie said there is “no compelling reason” for Bank Negara to ease the interest rate anytime soon.
“We expect Bank Negara to keep the OPR steady at 3% by end-2023 and in the first half of 2024.
“This is because the balance of risks to economic growth is tilting towards the downside amid low headline inflation for now,” he said.
Since May 2022, Bank Negara has raised its OPR by 125 basis points (bps), raising the interest rate from 1.75% to 3%.
However, in the last two MPC meetings, the OPR was left unchanged, notably after the new governor Datuk Abdul Rasheed Abdul Ghaffour took charge in July.
The hike in interest rates allowed the country’s headline inflation to trend down from 4.7% in August 2022 to 1.9% in September 2023.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the central bank has established a comfortable monetary policy space that can be used during periods of economic instability.
“In a way, the bias for the OPR is leaning towards stability and should the economic outlook deteriorate arising from the global slowdown and geopolitical event, Bank Negara can resort to a reduction in OPR to support the economy.
“It really depends on the incoming data and outlook.
“For now, the Malaysian economy has been fairly stable with the advance gross domestic product estimates for the third quarter of 2023 coming in higher at 3.3% from 2.9% (in the previous quarter).
“So, I think Bank Negara might opt to keep the OPR steady at 3% this year,” according to him.
All eyes are once again on the OPR decision next week after the Federal Reserve (Fed) chairman Jerome Powell recently hinted that the high interest-rate environment remains necessary as inflation continues to be high.
It is noteworthy that the Fed, the central bank of the United States, raised the country’s interest rate to a range of 5.25% to 5.5% in July. This was the highest range in 22 years.
On Oct 19, Powell signalled the Fed’s willingness to hold the FFR at its next policy meeting from Oct 31 to Nov 1.
The run-up in long-term Treasury yields could allow the central bank to continue its interest rate pause.
However, Powell also warned of more rate hikes if the US economy heats up or if the labour market stops cooling.
Currently, the OPR-FFR differential is the widest ever recorded at 225 bps.
The last time the OPR-FFR differential turned negative – the OPR staying below FFR – was between March 2005 until Nov 2007.
In a note issued last month, MIDF Research said that the widening OPR-FFR differential is one of the major factors contributing to the weak ringgit.
“The ringgit will stay on the depreciation path as the Fed keeps on delaying its interest rate pause,” it said.
Mohd Afzanizam opined the wider OPR-FFR spread might have some bearing on the OPR decision next week.
“But I think Bank Negara will weigh all angles including the growth prospects and whether the current turbulence in geopolitics might lead to negative shocks to the economy,” he added.
Meanwhile, Manokaran cautioned that the OPR should not be raised with the intention of “rescuing” the ringgit.
“The ringgit is not the only currency depreciating against the US dollar. So, raising the OPR will not help the ringgit much.
“The strengthening of the greenback is a short-term effect due to global uncertainties,” he said.
Looking ahead, Manokaran pointed out the possibility of a 25 bps OPR hike next year as headline inflation is expected to increase in 2024, partly due to a gradual shift towards targeted subsidies.
The Finance Ministry estimates the inflation rate for 2024 at between 2.1% and 3.6%. As for this year, the inflation is projected at between 2.5% and 3%.
“Bank Negara must first analyse whether the increase in inflation next year is cost-push or demand-pull.
“If it is mostly due to cost increases, a hike in OPR would not be effective enough,” said Manokaran.
SERC’s Lee said the targeted subsidy rationalisation will be implemented gradually to manage price and cost pressures on the households and businesses.
Mohd Afzanizam believed that the decision to cut subsidies is taken out of necessity and to ensure a more resilient fiscal policy space to face possible calamities.
“There is always a policy trade-off such as consumers might become cautious in their spending and businesses would become guarded in their capital spending plans.
“I think this is something that the country has to endure in order to allow fiscal consolidation to take place,” he said.
