UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting review the latest interest rate decision by the Bank Negara Malaysia (BNM).

Key Takeaways

“Bank Negara Malaysia (BNM) lifted the Overnight Policy Rate (OPR) for the fourth straight meeting by 25bps to 2.75% today (3 Nov), coming after the US Fed raised its Fed Funds Target Rate (FFTR) by a fourth consecutive 75bps to 3.75%-4.00% this morning. BNM’s decision matched Bloomberg consensus with 22 out of 24 economists/analysts polled calling for the hike while two (including us) projected a rate pause. To date, BNM has hiked 100bps, close to reversing the 125bps of rate cuts since the start of the pandemic in Jan 2020. This is the final meeting for the year, and the next monetary policy meeting is on 18-19 Jan 2023.”

“BNM judged this rate adjustment as necessary given that Malaysia’s economic growth prospects remain positive, with latest indicators showing robust domestic demand-led economic activities despite rising downside risks from the external front. Also, BNM needs to pre-emptively manage the risk of excessive demand on price pressures. Although headline inflation may have peaked in 3Q22, BNM expects inflation pressures (for headline and core) to remain elevated going into 2023 due to both demand and cost pressures as well as any potential changes to the subsidy policies.”

“We are revising our OPR outlook to factor in two more rate hikes (+25bps in Jan, +25bps in Mar 2023), to bring the projected terminal rate for OPR to 3.25% by end-1Q23. This is premised on: 1) BNM’s pre-emptive moves to manage elevated price pressures and anchor inflation expectations, and 2) further aggressive adjustments in US interest rates with potentially higher terminal FFTR that could push other central banks to lift rates higher over the coming months. As BNM kept its stance that there is no ‘pre-set course’ for OPR and any adjustments will be done in a ‘measured and gradual manner’, we expect BNM to maintain the pace of 25bps rate hikes in the first two meetings in 1Q23.”