KUALA LUMPUR: Bank Negara Malaysia is expected to keep its key Overnight Policy Rate (OPR) unchanged at 3.00 per cent at its Monetary Policy Committee on March 6-7, said Octa.
The firm said Malaysia's January inflation figures, together with weaker real gross domestic product growth in the fourth quarter of 2023 and continued currency weakness, reinforced the view that the central bank will continue keeping the OPR stable at 3.00 per cent through 2024 and lean towards a 25 basis points rate cut a year from now.
In recent months, the overall inflation rate in Malaysia has been slowing down.
According to the latest monthly highlights and statistics, headline inflation was 1.5 per cent year-on-year in January 2024.
"Although inflation has declined significantly, it would be premature for Malaysia to declare victory over high inflation.
"Several internal and external factors could derail the decline in inflationary pressures. These include geopolitical tensions, high interest rate differentials, and currency depreciation. The last factor on the eve of the MPC meeting is the most relevant," Octa said.
The firm said "policymakers have stepped up their rhetoric" to contain the local currency's fall after last week when it hit its weakest level since the height of the 1998 Asian financial crisis.
"A key message from the government is a willingness to sell dollars from its reserves to limit the ringgit's interchangeable weakness," it added.
Bank Negara Malaysia is prepared to sell US dollars from its reserves to "restrict excessive weakness in the ringgit" the nation's second finance minister Datuk Seri Amir Hamzah Azizan reportedly said.
Octa said the policy statements had a positive effect.
The ringgit gained strength against the US dollar at the beginning of the trading week - US dollar-ringgit is trading below the 4.8000 level, which was deemed as a critical benchmark for the central bank to start currency interventions.
Bank Negara has kept its key rate at 3.00 per cent since July, making it a record low relative to the Fed funds rate.
The interest rate gap prompts foreign investors to withdraw capital from the domestic market, thereby adding pressure on the ringgit.
Nevertheless, Octa said investors are optimistic about the further development of the situation, as starting from the second half of the year, the prospect of a rate cut in the US Federal Reserve strengthens.
This factor will support the ringgit, which may recover to 4.5000 by the end of the year, Octa said.