KUALA LUMPUR: Bank Negara Malaysia (BNM) is expected to extend its rate pause when it meets tomorrow, maintaining the overnight policy rate (OPR) at 3.00 per cent pending finer details on fuel subsidy rationalisation plans.
This is amid benign inflation pass-through from increases in electricity and water tariffs as well as the service tax hike in first quarter of 2024.
BNM is due to issue its third monetary policy statement for the year tomorrow.
The statement provides an update on BNM Monetary Policy Committee's outlook for the economy and action on the OPR.
CIMB Treasury and Markets research said looking ahead, inflation looks to be tilted to the upside with fading high base effects and the government's commitment to subsidy reforms.
The rate of incline however is clouded by uncertainties on implementation timeframe and/or mechanism − i.e. diesel and RON95 subsidy rationalisation approach have not been brought to the cabinet for discussion − which underpins BNM's wide inflation projection range of 2.0-3.5 per cent and its data-dependent stance on monetary policy.
"As such, we expect BNM to extend its rate pause pending finer details on fuel subsidy rationalisation plans, keeping the OPR at three per cent on May 9, 2024," the research unit said.
Withdrawals from soon-to-be introduced EPF Account 3 and civil servants' salary hike are poised to give private consumption a boost, though the real impact may be diluted by higher inflation in 2H24, which keeps demand-pull inflation in check.
"The demand boost and administered price policy changes nonetheless maintain the hawkish skew for OPR – particularly in the context of the delayed Fed pivot and renewedemerging market currency volatility," the firm said.
"Given a preference for intervention and resident inflows to address ringgit's weakness, monetary policy is likely to remain status quo and we maintain our end-2024 OPR forecast of three per cent," it added.
CIMB Treasury and Markets research said the sensitivity of private consumption is a declining function of income levels, reacting more strongly to permanent income changes than transitory ones.
Therefore it sees a differentiated impact on consumer spending from the EPF Flexible Account 3 effective May 11, and the proposed civil servants' salary hike of more than 13 per cent, in December 2024.
"We expect the spillover of the former to be milder and short-lived, given Account 2 balances are skewed towards members in higher income brackets with lower marginal propensity to consume," it said.
Furthermore, the impact may be diluted by higher inflationary environment in 2H24 from further subsidy rationalisation.
On the other hand, the spillover of civil servants' salary hike to consumption is likely greater − to the tune of 25-30 per cent − for those in llower grades/low-income group, who are likely to spend a higher portion of additional income earned.
CIMB Treasury and Markets research said it reiterates its 2024 gross domestic product growth forecast of 4.9 per cent for the country for the year.