KUALA LUMPUR: Bank Negara Malaysia will likely stay pat on its overnight policy rate (OPR) during its monetary policy meeting (MPC) this week and through 2024, despite mounting pressures to tighten further.
Slowing economy and "tamed" inflation could be firm enough reasons to keep the OPR steady at 3.00 per cent in the sixth and final meeting of the central bank's Monetary Policy Committee (MPC) on Nov 2.
Malaysia University of Science and Technology economist Dr Geoffrey Williams expects the OPR to stay unchanged, even in the face of mounting pressures for further tightening.
He further noted that headline inflation is at 1.9 per cent, in line with historical averages, while core inflation stands at 2.5 per cent, slightly elevated but considerably lower compared to previous periods.
"In addition, economic growth is slower due largely to external factors so support for the domestic economy is necessary from stable interest rates," he told Business Times today.
On whether there are rising risks to the domestic inflation outlook amid government plans to introduce targeted subsidies for electricity, diesel, and eggs, Williams said there might be some small one-off effects on certain prices in the Consumer Price Index (CPI).
Nonetheless, he emphasised that, on the whole, prices remain relatively steady, making it a good time for subsidy rationalisation.
Williams added that following the government's latest decision to lift the subsidy on chicken, there would be very little impact on inflation from chicken prices.
"The inflation pressure comes from higher oil prices and the effect on supply-chain costs as well as some pressure from higher import prices due to a weaker exchange rate but these are expected to be moderate," he said.
Tradeview Capital Sdn Bhd vice president Tan Cheng Wen agreed with the consensus view that Bank Negara will likely keep the OPR unchanged in the upcoming MPC meeting.
While the depreciation of ringgit against the US dollar might be viewed as a source of pressure for Bank Negara to hike rates, the currency weakness is a common phenomenon across emerging markets due to aggressive rate hike by the US Federal Reserve.
"Also, with the market not anticipating any further rate hikes in the US, we believe that Bank Negara will likely adopt a wait-and-see approach amid a moderating inflationary environment domestically," he said.
Nevertheless, Tan said there are rising risks to the domestic inflation outlook, but he expects the government to be cautious about the potential inflation resulting from subsidy rationalisation measures.
Hence, he foresees the government enacting the proposed targeted subsidies with a more delicate and measured approach.
With the lifting of chicken subsidies, Tan said it seems unlikely that chicken prices will unravel as the production cost of chicken has come down in tandem with the decline in feed costs.
He noted that global corn prices have seen a decline of close to 30 per cent year to date.
Currently, the ceiling price for chicken is set at RM9.40 per kg, while the market price is below RM9 per kg.
UOB's Global Economics & Markets Research also expects Bank Negara to keep the OPR unchanged.
In a recent note, the firm said another 25 basis points (bps) hike in the OPR will not be sufficient to close the interest rate gap with US rates and spur market confidence on the ringgit with the current gap at -250bps.
It added that the global landscape is currently highly uncertain, triggered by skepticism over Fed's future rate path, China's real estate woes and new geopolitical tensions that tilts growth risks on the downside.
UOB noted that the pressures of hiking rates intensified after strong US economic data repriced the odds for higher-for-longer Fed rates, ringgit declining to its lowest level since Asian financial crisis and a surprise rate hike by Bank Indonesia on Oct 19 to arrest the rupiah's decline.
"In addition, the unity government has just unveiled an expansionary budget for 2024 to boost growth momentum.
"This infers that future monetary policy moves would need to be synchronised in order to attain the same goal for the country," it said.