PETALING JAYA: Bank Negara has kept its overnight policy rate (OPR) unchanged at the record-low level of 1.75% amid a more positive economic outlook and a moderate inflation expectation for 2022.
This was in line with what the market was expecting with polls by Bloomberg and Reuters expecting the central bank to maintain the benchmark interest rate.
In justifying its decision to retain the OPR, the Monetary Policy Committee (MPC) of Bank Negara said the current stance of monetary policy is considered to be appropriate and accommodative.
“Fiscal and financial measures will continue to cushion the economic impact on businesses and households and provide support to economic activity.
“The stance of monetary policy will continue to be determined by new data and their implications on the overall outlook for inflation and domestic growth,” the MPC said in a statement.
The committee had its first meeting for the year yesterday. The next meeting is scheduled for March 3.
Bank Negara said the latest high-frequency indicators showed that economic activity had rebounded in the fourth quarter of 2021.
It is positive that the Malaysian economy would expand by 3% to 4% in 2021, as guided earlier by the government.
As for 2022, the central bank expects growth to gain further momentum, although it cautioned that the risks to the outlook remain tilted to the downside.
“This (growth) will be driven by the expansion in global demand and higher private sector expenditure amid improvements in the labour market and continued policy support.
“Risks may arise from a weaker-than-expected global growth, a worsening in supply chain disruptions, and the emergence of severe and vaccine-resistant Covid-19 variants of concern,” it said in a statement yesterday.
Beyond Malaysia, Bank Negara noted that the global economy continues to recover, supported by manufacturing and trade activity. Labour market conditions have also improved in many countries.
However, several countries reintroduced measures to curb the ongoing Covid-19 resurgences, causing some moderation in the pace of recovery in domestic activity, especially services.
On headline inflation, Bank Negara anticipates it to likely remain moderate in 2022, as the base effect from fuel inflation dissipates.
“Underlying inflation, as measured by core inflation, is expected to edge upwards as economic activity normalises amid the environment of high input costs.
“Nevertheless, core inflation is expected to be modest, with upside risk contained by the continued slack in the economy and labour market.
“The outlook, however, continues to be subject to global commodity price developments amid risks from prolonged supply-related disruptions,” it said.
As for the January-November 2021 period, Bank Negara noted that the country’s headline inflation averaged 2.3%.
While the central bank has retained the OPR, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie believes the policy rate would be raised twice later this year.
There needs to be a balance between supporting growth and keeping a lid on inflation, he said.
“If you don’t do so now to contain inflation, it could go higher and impact on economic recovery.
“Bank Negara would need to consider taking small steps now if economic conditions permit, probably in the second and third quarter.
“While we expect domestic demand to drive Malaysia’s economic growth, external headwinds are still a concern,” he told StarBiz yesterday.
Meanwhile, MIDF Research anticipates Bank Negara to undertake its first rate hike in the second half of this year.
It said the central bank’s current focus on monetary policy setting is to ensure a sustainable recovery of Malaysia’s economy, especially coming out from the long containment measures imposed last year.
With the rate of inflation hovering within Bank Negara’s forecast, MIDF Research opined there is less pressure for the central bank to quickly shift towards policy tightening.
“However, the decision (to hike rates) will be subject to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.
“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as the persistently high inflation and a further rise in household indebtedness,” it said in a note yesterday.
On Bank Negara’s decision to maintain the OPR until the next MPC meeting, MIDF Research described the move as “appropriate” to provide support to country’s economic recovery.