RHB Research maintains 3.25% OPR forecast on further ringgit weakening, sticky inflation

• The research house’s view contradicts OCBC’s and UOB’s view that BNM will hold the OPR at 3% for the rest of the year, but aligns with MIDF Research's view that an increment will occur in the second half of the year.

KUALA LUMPUR (July 7): RHB Research maintained its Overnight Policy Rate (OPR) forecast at 3.25%, in contrast with most other economists who see Bank Negara Malaysia holding on to the 3% key borrowing rate until the end of the year.

“Our reading of the central bank’s move to hold the OPR steady is partly due to its core view of inflation risks are limited and that the weakness in the ringgit is mainly due to external factors,” said RHB’s economist Chin Yee Sian and associate research analyst Wong Xian Yong in a note issued on Thursday (July 6).

The research house’s view contradicts OCBC’s and UOB’s view that BNM will hold the OPR at 3% for the rest of the year, but aligns with MIDF Research's view that an increment will occur in the second half of the year.

Chin and Wong predicate their forecast on three underlying factors, the first being that the ringgit is expected to be under pressure in the second half of the year (2H2023) as the ringgit’s negative carry against the US dollar is likely to rise in 2H2023.

“[Given] the widening interest rates differential between the OPR and Federal Funds Rates (FFR), the FFR are likely to accelerate to a peak of 5.50-5.75% by 2H2023,” Chin and Wong added.

Subsequently, both economists predict that economic growth momentum will likely remain resilient moving into the second half, anchored by persistent domestic demand via robust household spending on the back of healthy labour market conditions, the revival of tourism-related activities, and the continued progress of multi-year infrastructure projects.

Thus, Chin and Wong expect the gross domestic product (GDP) to expand by 5.2% year-on-year (y-o-y) in 2H2023 compared to 4.6% in 1H2023.

“We maintain our base case view that trade momentum is likely to show signs of improvement by early 2H2023 in tandem with our 2H2023 global recovery view,” they said.

Lastly, they think that core inflation will remain above the long-term average in 2H2023, amid resilient domestic demand pressure further fuelled by a prolonged low-interest rate environment.

Chin and Wong maintained their core inflation forecast at 3.5% y-o-y and headline inflation forecast at 3% y-o-y.

The numbers contrast the central bank’s opinion in March that both headline and core inflation are projected to trend lower at a range of 2.8%-3.8%.

“The risks to inflation outlook remain highly subject to the degree of persistence in core inflation, changes to domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments,” the pair said.

The duo also said they "don't subscribe to" BNM's view that the weakness of the ringgit is caused by external elements, rather than domestic issues.

Additionally, they said that BNM’s foreign exchange (FX) intervention measures to stabilise the US dollar and ringgit disparity have gradually gained momentum recently, signalling that BNM is not willing to engage in an interest rate defence of the currency.

“BNM view on the global economy is relatively conservative, which is in line with the consensus view of a challenging environment for the world in 2H2023,” the pair said, noting that it contrasted with their belief of a global recovery by early 2H2023.