Bank Negara Malaysia to keep overnight policy rate steady at 3%

Overall GDP growth this year may fall to the lower end of the official forecast range of 5-6%. Indeed, given the global uncertainties, the balance of risk has decisively shifted to growth despite persistently high inflation. That said, it is also premature to look into loosening of monetary policy as the current negative real interest rate essentially implies that monetary policy is still accommodative. Furthermore, it should be noted that Malaysia already has an expansionary fiscal policy that is inflationary in nature.

As such, we expect Bank Negara Malaysia to stick to a steady course and keep the Overnight Policy Rate (OPR) steady at 3.00% in the coming policy meeting. This is especially so given that the central bank has initiated its interest rate normalisation process earlier than many central banks in the region and hence, it probably has enough room to pause and assess the situation before it decides the next course of action.

On that note, the central bank ended its previous statement by highlighting that it will “assess carefully the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability”. In short, BNM is not fully done with its normalization process. At least another rate hike lies ahead, most likely before the end of the year. With that, we are maintaining the view that Bank Negara will eventually hike the OPR by another 25bps to 3.25% during the November meeting. Any improvement in economic data in the US and Eurozone will surely increase the odds.