OPR to remain on hold at 3% for the rest of 2023, Fitch Solutions says

• In a report on Thursday (May 4), BMI, a Fitch Solutions company, said that as inflation continues to moderate domestically, "we believe BNM will increasingly turn its focus to supporting growth over the coming months".
• “Headline inflation continued to ease from 3.7% year-on-year in February to 3.4% in March, marking the slowest pace in nine months.”
• “We believe inflation will continue to moderate in the coming months, due to base effects and softer commodity prices."

KUALA LUMPUR (May 5): Fitch Solutions sees Bank Negara Malaysia (BNM) at the end of its hiking cycle, leaving the overnight policy rate (OPR) on hold at 3% for the rest of 2023.

In a report on Thursday (May 4), BMI, a Fitch Solutions company, said that as inflation continues to moderate domestically, "we believe BNM will increasingly turn its focus to supporting growth over the coming months".

“This view is supported by a statement released by the central bank, where it believes the current monetary policy stance ‘is slightly accommodative and remains supportive of the economy’," BMI said.

On Wednesday, the central bank raised the OPR by another 25 basis points to 3%.

BMI said the OPR hike was in line with its expectations, and above the Bloomberg consensus survey for a hold.

On the outlook for the next meeting in July, the firm expects BNM to leave its policy rate on hold, due to easing of headline inflation and lesser currency volatility.

“Headline inflation continued to ease from 3.7% year-on-year in February to 3.4% in March, marking the slowest pace in nine months.

“We believe inflation will continue to moderate in the coming months, due to base effects and softer commodity prices," said BMI.

It added that the ringgit would continue range trading in the coming months, indicating that currency volatility would not pose a concern for BNM.

“Following the US Federal Reserve’s (Fed) latest meeting on Wednesday, our global team expects the federal funds rate to be raised only marginally further to a peak of 5.50% by the first half of 2023, from 5.2% currently.

“Even if BNM leave rates on hold for the rest of 2023, it is unlikely to trigger significant portfolio outflows, as the divergence in interest rate differentials would be very small.”

BMI also expects a moderate economic growth in the coming quarters — to 4.8% in the first quarter of 2023 from 7% in the fourth quarter of 2022 — and below the pre-pandemic average of 4.6% recorded between 2018 and 2019.

“Importantly, we expect pent-up demand to fade, and the slowdown in external demand to also filter through to other parts of the economy.”

The firm stated that risks to interest rate forecasts are skewed to the upside, as BNM could tighten monetary policy to anchor the ringgit's stability should the US dollar strengthen amid steeper-than-expected rate hikes by the Fed, or a spike in global risk aversion.

At the same time, upside risks to inflation are subject to any changes to subsidies and price controls, as well as geopolitical developments globally, which would impact commodity prices, added the firm.