KUALA LUMPUR: Malaysia's policy rate is now back to pre-pandemic level but economists are mixed on whether the central bank will leave the rate unchanged at 3.00 per cent for the rest of the year.
Those who believe Bank Negara Malaysia would remain on hold attributed this partially to rising recession risks in advanced economies. This follows the flare up of global banking crisis and the US debt limit issue amid tighter financial conditions.
Bank Negara surprised the market by raising its Overnight Policy Rate (OPR) by 25 basis points to 3.00 per cent following its Monetary Policy Committee (MPC) meeting on Wednesday, after keeping rates unchanged during the last two meetings since January.
OCBC Bank chief economist Selena Ling said the bank and consensus had expected for the OPR to stay on hold.
"The recent mix of weakening external data and easing inflation had suggested to us that Bank Negara would not be inclined to hike further. However, the justification for the hike came from Bank Negara's assessment of 'further expansion in economic activity in the first quarter of 2023 after the strong performance in 2022' driven mainly by resilient domestic demand," Ling said.
She expects Bank Negara to remain on hold for the rest of 2023.
"With this decision, Bank Negara declared that it has 'withdrawn the monetary stimulus intended to address the Covid-19 crisis in promoting economic recovery'.
"That said, Bank Negara has not closed the door on further tightening citing the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances," she said.
UOB senior economist Julia Goh said given that OPR was now at the bank's estimated terminal rate, Bank Negara would likely leave rates unchanged for the rest of the year.
"We maintain our view that the OPR has reached its peak at 3.00 per cent, which is the pre-pandemic level. There are less compelling reasons justifying a need for a further rate hike or a rate cut by Bank Negara going into the second half of 2023, unless the global and domestic conditions take a swift turn," Goh added.
She said the hike came in line with UOB's expectations but contrary to Bloomberg consensus, with 16 polled analysts expected no change while three (including UOB) expected a 25bps hike.
The MPC will next meet on July 5-6.
Dr. Liew Chee Yoong, who is assistant professor of finance at UCSI University Malaysia, feels that a further increase in OPR in the next meeting is possible. This is dependent on the direction of the US Federal Reserve's interest rate.
"It also depends upon the level of inflation rate in Malaysia whether it goes up or down or remains the same," said Liew, who is also research fellow at CME.
He said generally, the decision by Bank Negara to increase or decrease the OPR was reliant on various economic factors such as inflation, economic growth and currency stability.
"If Bank Negara believes that inflation is rising above its target range, it may increase the OPR to reduce borrowing and spending, which can help to curb inflation. Similarly, if Bank Negara believes that the economy is slowing down, it may decrease the OPR to encourage borrowing and spending, which can stimulate economic growth.
"Overall, the decision to increase or decrease the OPR is dependent on various economic factors and is subject to Bank Negara's assessment of the economic conditions," Liew added.