KUALA LUMPUR: Bank Negara Malaysia says it is possible for further adjustments to its benchmark Overnight Policy Rate (OPR) with inflation levels expected to moderate but remain elevated throughout the year.
Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus, however, said ultimately further monetary policy normalisation would be informed by evolving global and domestic conditions.
The central bank had left the OPR unchanged at its two previous meetings this year, citing a\ need to assess the economic impact of four consecutive rate hikes in 2022.
Bank Negara's Monetary Policy Committee (MPC) gradually increased the OPR through four 25 basis points adjustments at last May, July, September and November meetings.
This resulted in a total increase of 100 basis points, bringing the OPR to 2.75 per cent from a historical low of 1.75 per cent in 2020 during the midst of the Covid-19 pandemic.
"The MPC remains vigilant to factors driving inflation, including those arising from financial market developments, which could shift our assessment of the inflation outlook," Nor Shamsiah said at the release of Bank Negara's annual report.
She added that it was also mindful of the risk that price pressures could last longer than expected, especially if upside risks materialised.
"This is why it is important for us to stay attentive to how inflationary pressures will evolve, in ensuring sustainable growth. We do acknowledge that this is a delicate balancing act, especially in the context of this uncertain economic environment.
"With such considerations in mind, there is potential for the degree of accommodation to be further adjusted. But as I said, it will be informed by the evolving conditions and their implications on the overall outlook of domestic inflation and growth, which the MPC will assess at each meeting," she said.
According to Nor Shamsiah, said inflation was expected to moderate, driven by the lower prices of key commodities
Both headline and core inflation are projected to average between 2.8 per cent and 3.8 per cent in 2023.
"However, the outlook for inflation in 2023 remains tilted to the upside. Upside risks include worsening geopolitical conflict leading to higher commodity prices, extreme weather conditions, stronger-than-expected demand from China and higher input costs due to exchange rate developments."
She said the Malaysian economy was expected to continue to expand this year, and not enter a recession despite the external headwinds.
Nor Shamsiah reaffirmed that Malaysia's economy would likely grow between 4.0 per cent and 5.0 per cent in 2023, supported by firm domestic demand.
On the demand side, Nor Shamsiah said household spending would be an important driver. It is projected to expand at a moderate pace of 6.1 per cent.
"This will be underpinned by continued income growth, with support from government policy measures such as higher minimum wage for small firms, expansion of overtime pay eligibility, and direct cash assistance," she said.
Meanwhile, Nor Shamsiah said a critical driver to consumption activity was sustained improvements in labour market conditions.
She said this would be supported by continued expansion in consumer- and tourism-related sectors, and policy measures such as hiring incentives and upskilling initiatives.
"Given these drivers, we project the unemployment rate to average at about 3.5 per cent for 2023 as a whole.The unemployment rate is expected to drop steadily over the year to the pre-pandemic average rate of 3.3 per cent by year-end. At 3.3 per cent, the economy would technically be at full employment," she said.
On the ringgit, Nor Shamsiah said its movements continued to be mostly driven by US dollar strength, in line with global and regional trends and mainly driven by external factors.
She said under a flexible exchange rate regime, it was reasonable to expect the ringgit to fluctuate from time to time.
"These adjustments are necessary to allow the domestic economy to adjust to global economic and financial shocks. Whether the ringgit appreciates or depreciates, there will always be winners and losers.
"What is important is that the adjustments take place in an orderly manner to facilitate decisions by households and businesses to consume and invest. On aggregate, these adjustments should benefit the economy in the long run," she added.