BMI: BNM expected to keep OPR at 3pc till end 2024

KUALA LUMPUR: BMI Research, a company under Fitch Solutions, expects Bank Negara Malaysia (BNM) to maintain the benchmark overnight policy rate (OPR) at three per cent throughout 2024, on lower headline inflation and continued pressure on the ringgit.

The next Monetary Policy Committee (MPC) meeting on the OPR is scheduled for January 24, 2024.

In a note issued today, the research firm said headline inflation has remained on a clear downward trajectory, having fallen to a 30-month low of 1.9 per cent in September.

"September's reading also marked the second consecutive month headline inflation fell below the ten-year average of 2.0 per cent, which we expect will reduce the pressure for the government to intervene. We further expect inflation to ease over the coming months to touch 1.8 per cent by end-2023," BMI said.

While core inflation remains above its five-year average of 1.6 per cent, it has eased significantly from a peak of 4.2 per cent y-o-y in November 2022 to 2.5 per cent in September 2023.

"As things stand, Malaysia's year-to-date inflation readings are on track to meet the central bank's forecast for core and headline inflation to average between 2.8 per cent and 3.8 per cent this year."

"Thus far, the government's subsidies and price-control measures have helped to contain inflation. However, this trend might not be sustained in 2024. While the BNM expects that inflation will remain modest in 2024, it did note upside risks to this view as the government contemplates on revising subsidies and price controls

next year," BMI said in its note.

On how the performance of the ringgit can impact BNM's decision on the OPR, it said, the possibility of the US Federal Reserve announcing another rate hike in December is likely to stop the central bank from loosening monetary policy just yet.

The ringgit has come under significant pressure, having depreciated by 6.5 per cent against the US dollar year-to-date.

This positions the ringgit as the worst-performing currency in the region, after the Japanese yen.

A situation that did not go unnoticed by the BNM, which in its monetary policy meeting minutes, which noted that 'the expectations for a higher-for-longer interest rate environment in the US' has led to renewed dollar strength.

"Indeed, while we think that the US Federal Reserve is done hiking its key rate, the outcome of the recent US Federal Reserve meeting in November prompted speculation of a further hike in December."

"We expect that the BNM will not want to loosen monetary policy when this might risk destabilising the ringgit and exert further downside pressure on the currency," BMI said.

The firm expects the ringgit to strengthen slightly by end-2023 to 4.550 against the US dollar, due to a sustained current account surplus.

"As compared to its regional peers, the BNM's cumulative 125-basis point hike has been relatively modest, which indicates a less dire (need) for the central bank to cut rates soon. Indeed, policymakers described the current monetary policy stance 'remains supportive of the economy' and is in line with Malaysia's current inflation and growth trajectory," BMI said.

Risks to its interest rate forecasts are skewed to the upside though, with BNM expected to raise interest rates further to maintain real interest rate differential with the US dollar, should the ringgit face further depreciatory pressure.

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