KUALA LUMPUR: Interest rates in Malaysia may begin to normalise next year, subject to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions.
At the Monetary Policy Meeting on Wednesday, the central bank said it decided to keep the overnight policy rate (OPR) unchanged at 1.75%.
MIDF Research opined that this was to ensure a sustainable recovery of Malaysia’s economy, coming out from a lockdown.
With the rate of inflation hovering within Bank Negara’s forecast, there is less pressure for the central bank to quickly shift towards policy tightening.
“We expect the policy normalisation will likely be carried out in the latter half of 2022.
“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,” said the research unit.
Also, the central bank expects the improving growth momentum to continue going into 2022, supported by continued expansion in the external demand and increased private sector spending activity.
However, the central bank reiterated its concerns on the downside risks, which include potentially weaker global growth, continued disruption from supply chain challenges and re-introduction of Covid-19 restrictions, which would hurt economic activities.
Meanwhile, the central bank views inflation to be manageable as the latest inflation reading remained within its 2% to 3% inflation forecast range.
In September 2021, the headline inflation rate accelerated to 2.2% year-on-year (August 2021: 2% year-on-year), with a further rise in food and transport prices, which can be attributable to the high global commodity prices.
MIDF Research also pointed out that for the first nine months in 2021, the year-to-date average inflation rate was at 2.3% year-on-year.
The central bank also shared its view that inflation will moderate going into 2022, with core inflation to increase but remain benign due to ongoing excess capacity in the economy as well as slack in Malaysia’s job market.
“Once again, the price outlook will depend on the movement in the global commodity prices, as well as upward pressure due to the prolonged supply constraints,” said MIDF Research.
Meanwhile, OCBC Treasury Research opined that the central bank can and will leave its OPR unchanged at 1.75% throughout 2022.
“Such a view will require ‘cooperation’ from a few factors, naturally. Apart from domestic inflation out-turn into next year, perhaps what matters more ultimately will be the global market sentiment, especially when it comes to any marked upshift in the United States Fed Funds rates outlook,” said OCBC Treasury Research.
“We continue to see a central bank that will be committed to supporting growth for as long as it can by keeping the policy rate anchored at the current low level,” it said, adding that inflation should remain broadly anchored as well, given the lingering output gap.
For instance, the unemployment rate remains lofty at 4.6%.
OCBC Treasury Research noted that even if the unemployment rate has come down from the peak of 5.3% last year, it remains well above the 3.3% pre-pandemic run rate, just one sign of how the impact of the pandemic on the labour market remains far from being resolved.
The research unit also pointed out that there are aspects that suggest the central bank is now anticipating the need to preempt any rise in market anticipation for policy rate hike in Malaysia.
“The central bank is keen to portray that inflation remains tame and not a big issue in Malaysia.
“Core inflation is expected to remain low at below 1% for this year, for instance, while headline inflation is projected to remain moderate moving into 2022,” said OCBC Treasury Research.
Even as the central bank acknowledges that “core inflation is expected to edge upwards” as activities normalise, it is seen to “remain benign, given the continued spare capacity in the economy and slack in the labour market.”
OCBC Treasury Research said while the conversation was all about how growth would be okay despite near-term challenges – and hence there is no need to cut rate – it has evolved perceptibly to a heavier emphasis now on how inflation is still subdued – and how policy rate does not need to shift up.
“Given that the central bank had refrained from cutting rates even when the pandemic scare was at its worst earlier this year, its decision to keep rate unchanged yet again should not come as a surprise at all, since the situation has stabilised, and the economy is reopening once again,” it said.