Bank Negara Malaysia (BNM) will increase the overnight policy rate (OPR) by 25 basis points (bps) to 2.5%, according to all but one of the 19 economists in a Bloomberg survey.
Bloomberg Economics predicts the authority will deliver a half-point hike, on top of a total of the 50bps already seen so far this year.
BNM faces pressure to stay on its tightening course as the economy’s growth momentum and a weak currency fan price gains. The central bank has only two scheduled meetings remaining this year, including this week’s decision, to ensure inflation expectations stay anchored.
Consumer prices rose to a 14-month high in July, with food inflation hitting a record 6.9%. Malaysia’s economic growth is likely to remain on solid footing this quarter after expanding by a stronger-than-expected 8.9% in the April-June period. Both food and headline inflation measures will be under pressure, raising bets for further tightening.
“Given a robust Q2 gross domestic product growth print, signs of further economic expansion in the second half albeit at a moderate pace, and broadening second-round effects on inflation, BNM will likely follow through with a third 25bps hike,” United Overseas Bank (UOB) economists wrote in a report.
UOB raised its full-year inflation estimate to 3.5% from 3% previously. That’s above BNM’s price-growth forecast of 2.2% to 3.2% for 2022.
A hike in rates could benefit the ringgit, which has fallen to its lowest level since the 1998 Asian financial crisis, as safe-haven flows and rising US yields boosted the dollar. As of yesterday’s close, the currency has slid about 7.5% so far this year but it still fared better than other Asian currencies including the won and the yen.
BNM in its policy statements this year has flagged risks to the growth outlook from the moderation in world demand. Finance minister Tengku Zafrul Aziz has said the outlook will be more challenging heading into 2023 because of fears of a slowdown in the global economy.
Analysts will watch for any change in the language to gauge if future tightening would continue to be gradual and measured.
CIMB economists said they expect BNM’s tightening cycle to continue for the rest of the year and into the first quarter of 2023, reaching a terminal rate of 3.25%.