By Opus Asset Management Sdn Bhd
• Overnight Policy Rate (OPR) raised by 25bps to 2.0%; expecting more hikes ahead. Bank Negara Malaysia (BNM) has taken the initiative amongst its South-East Asian peers in raising its policy rate, with the central banks of Thailand and Philippines remaining unchanged on policy rates during their recent meetings. In light of BNM’s decision, our house view sees the possibility of another 1-2 rate hikes in 2H2022. Further normalisation from BNM going forward is certainly possible, and would be in line with our expectation of Malaysia’s long term interest rate being at 3%1.
• MPC statement reflects BNM’s emphasis on policy normalization. In terms of language, BNM has cushioned its rate hike decision with the caveat that the OPR was previously cut to a “historic” low of 1.75% and the ensuing abatement of pandemic conditions. The sudden rate hike was also framed by a statement that normalization would be “done in a measured and gradual manner”, although a continued economic recovery may leave the door open for more normalization going forward.
• Core inflation seen averaging between 2% – 3%. BNM projects inflation to normalize in line with Malaysia’s gradual economic recovery, with core inflation tracking closely with headline inflation (March headline: +2.2% YoY; March core: +2.0% YoY). However, we expect that BNM’s rate hike, along with current petrol and basic foodstuff price controls should serve to place a cap on Malaysia’s inflation outlook.
• Malaysian economic recovery backed by an improving labour market. Economic forecasts expect Malaysia’s Gross Domestic Product (GDP) to continue growing with median estimates of +4.0% YoY in 1Q22 (4Q21 GDP: +3.6%). In addition, we derive comfort from Malaysia’s stabilizing labour market with the unemployment rate projected to trend further downwards in 2022 (Mar’22: 4.1%; Feb’22: 4.1%).
• Malaysian Government Securities (MGS) markets still digesting BNM decision. In line with BNM’s surprising move to raise rate by 25bps, the short end of the yield curve rose, with a smaller initial reaction on the mid to long end. In our opinion, the fixed income market has already priced in interest rate normalisation in Malaysia, suggesting upside in OPR risks are more than accounted for. Thus, our house view of 1-2 more rate hikes of 25 bps for the Malaysian OPR in 2H2022 takes into consideration the strengthening Malaysian economic recovery and BNM’s pivot towards policy normalisation.
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