At the last MPC meeting in January, Bank Negara Malaysia (BNM) kept the key rate unchanged at 2.75% after making a cumulative 100-basis points (bps) hike since May 2022.
In a report, RHB Research said the central bank is expected to hike the OPR by 25 bps based on three main catalysts.
“Core Consumer Price Index (CPI) inflation is likely to remain elevated into the second quarter (Q2) of 2023, the nominal effective exchange rate (NEER) is on a steep trajectory down, and the risk of an announcement of a reinstatement of the Goods and Services Tax (GST) in the second half of 2023 and targeted fuel subsidy adjustment is up,” it said in a note today.
The research house said the 2023 peak OPR forecast is maintained at 3.25%, with the balance of risks tilted towards a print of 3.5%.
Real interest rates too low
At a big picture level, it said real interest rates are too low in an environment where the momentum of the economy is strong and is likely to remain above trend for the better part of this year.
“This is a cause for concern since it generates demand side pressures and induces upside pressures on core CPI inflation,” it added.
Meanwhile, AmBank Research said the probability of a rate hike in March has dissipated compared to its earlier assessment at the start of this year.
“We now see a rate hike to only take place in Q2 2023 or beyond that, depending on further guidance as well as how domestic inflation data evolves in the upcoming months,” it said in a note.
It pointed out the MPC’s remark in January that one reason for maintaining the rate was to allow it to assess the impact of the cumulative past OPR adjustments, given the lag effects of monetary policy on the economy.
“Determining the lag effect from rate normalisation that had taken place since May 2022 may require a longer time frame. Our analysis shows the impact of interest rate hike would take effect within eight to 10 months,” AmBank Research said.
On further guidance, the research house said the release of the 2022 BNM Annual Report later this month could provide more dynamics in economic and inflation assessments.
“Against this backdrop, we maintain our call for another 25 bps increase (in Q2 and beyond), bringing the OPR back to the pre-pandemic level of 3%,” it added.