KUALA LUMPUR: Bank Negara has decided to increase the overnight policy rate (OPR) by 25 basis points to 2% - its first rate hike since July 2020.

       In a Monetary Policy Statement (MPS), the central bank said the ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.25% and 1.75%, respectively.

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       The latest move by Bank Negara is a contrast to a near-unanimous consensus of stable monetary policy. Polls by Reuters and Bloomberg suggested that Bank Negara is expected to keep its OPR unchanged at 1.75%.

       Bank Negara said the sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity.

       These have partly cushioned the impact of the military conflict in Ukraine and the strict containment measures in China.

       “Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US. Consequently, several central banks are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures.

       “The global growth outlook will continue to be affected by the developments surrounding the conflict in Ukraine, COVID-19, global supply chain conditions, commodity price shocks, and financial market volatility,” it said in the MPS.

       For the Malaysian economy, Bank Negara said the latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth.

       “The labour market is further lifted by a lower unemployment rate, higher labour participation and better income prospects.

       The transition to endemicity on April 1 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders. Investment activity and prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook.

       “However, risks to growth remain, which include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding Covid-19,” it said.

       Bank Negara said headline inflation is projected to average between 2.2% - 3.2% in 2022.

       “Given the improvement in economic activity amid lingering cost pressures, underlying inflation, as measured by core inflation, is expected to trend higher to average between 2.0% - 3.0% in 2022,” it said.

       Nevertheless, the central bank said upward pressure on prices would be partly contained by existing price controls and the continued spare capacity in the economy.

       “The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures on administered prices,” it added.

       Over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to provide support to the economy.

       The unprecedented conditions that necessitated such actions have since abated, Bank Negara said.

       “With the domestic growth on a firmer footing, the MPC decided to begin reducing the degree of monetary accommodation.

       “This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability,” the central bank said.