PETALING JAYA: A hike in the statutory reserve requirement (SRR) ratio could come into play in the second half of the year as a pre-emptive measure to manage potential risk from the build-up of liquidity in the banking system.
The build-up of liquidity could result in macroeconomic and financial imbalances, according to AmBank Group.
Based on the current data and future incoming data with more cost pressure emerging, AmBank Group chief economist Anthony Dass said “any rate hike by Bank Negara is more to address the interest rates differential.”
He added that should liquidity pose some challenges to financial stability, a 50 basis-points (bps) hike in SRR is more likely to emerge first followed by a 25bps rate hike in overnight policy rate (OPR) later in the second half of the year.
Dass told StarBiz that: “While near term headwinds ( Russia-Ukraine conflict and lockdown in China from the Covid-19 Omicron variant) are strong, it could start to ease in the second half of the year, which is our base case.
“If that happens, the upside economic trend would gain momentum.
“This would be supported by business and foreign direct investments capital expenditure expansion across economic sectors. Consumer spending will also gain momentum.
“Under such circumstances, there is a need to carefully manage the liquidity environment in the domestic financial system. If not managed carefully, it could create risks to the domestic macroeconomic and financial stability.”
Meanwhile, he expects inflationary pressure to persist underpinned by the Russia-Ukraine conflict and the lockdown in China due to the Omicron Covid-19 variant.
Dass added this would certainly add pressure on business cost, noting that it would be a matter of time before prices are transferred to consumers.
He said although February’s inflation rose moderately by 2.2% year-on-year (y-o-y) to bring the first two months average to 2.25%, upwards pressure remains.
“Although we project 2022’s headline inflation at between 2.8% and 3.0%, living cost will continue to accelerate at a much faster pace primarily due to cost factors more than consumer demand.
“Added with the rolling back of the moratorium, an uneven recovery and factoring a five-rate hike by the US Federal Reserve with the next at 50bps, we expect the central bank to remain cautious,” he said.
Meanwhile, Maybank IB Research said it is maintaining its 2022 inflation rate forecast at 2.7% (2021: 2.5%) but see upside risk from global energy commodity prices, especially crude oil as well as elevated food-related commodity prices, including crude palm oil price, and global supply chain disruptions in the wake of Russian invasion of Ukraine.
“However, mitigations include the continued “blanket” fuel price subsidies thus far, implementation of price administration and supply-side measures (e.g. freeze on base electricity tariffs for all electricity users in Peninsular from Feb 1 this year until end-2024, introduction of subsidy to poultry farmers for chicken and eggs production, allowing short term importation of frozen whole chicken) and as well as remaining slacks in the economy to contain demand-pull and wage-driven inflation,” the research house added.
Separately, CGS-CIMB Research said cost-push inflation may intensify as the onset of the Russia-Ukraine crisis bolstered commodity prices across food, energy and metals.
It reiterates its forecast of two 25bps rate hikes in the second half, lifting the OPR to 2.25% by end-2022.