MALAYSIA: On Thursday (7 Sept), the Bank Negara Malaysia (BNM) left its overnight policy rate (OPR) unchanged at 3% for the third consecutive month.
BMI, a unit of Fitch Solutions said BNM would begin to cut rates in the early first half of 2024, alongside other major central banks including the US Federal Reserve.
“According to the latest monetary policy statement, the central bank believes that the current policy stance ‘remains supportive of the economy’ and is in line with the country’s inflation and growth trajectory.”
“Indeed, headline inflation has been falling steadily since peaking at 4.7% year-on-year (y-o-y) in August 2022. It most recently touched a near two-year low of 2% in July.”
“Likewise, core inflation has eased, falling from a peak of 4.2% y-o-y in November 2022 to 2.8% in July,” the research house said in a statement.
It expects base effects to remain favourable in the coming months and underlying price pressures to ease amid a weakening economy.
Real gross domestic product (GDP) growth already slowed from 5.6% y-o-y in the first quarter of 2023 (Q1’23) to 2.9% in the second quarter of 2023 (Q2’23).
“We forecast real GDP growth to slow from 8.7% in 2022 to 4% in 2023, which is below the pre-pandemic average (2015-2019) of 4.9%.
“Given these considerations, we are lowering our end-2023 inflation forecast from 2% y-o-y previously to 1.8%. This would bring average inflation to 2.6% in 2023, as opposed to 3.4% in 2022,” it said.
In the future, BNM will be wary of loosening monetary policy too soon, it said.
As compared to its regional peers, the central bank’s cumulative 125-basis point hike has been relatively modest, which indicates a less dire need for the BNM to cut rates too soon.
“Additionally, at the time of writing, the Malaysian ringgit is down 5.8% against the US dollar in the year to 7 Sept 2023, which makes the ringgit one of the weakest currencies in the region after the Japanese yen.
“While a slight weakness in the ringgit is supportive of Malaysia’s lacklustre export performance, a swift return to monetary loosening runs the risk of exacerbating further downside pressure on the ringgit,” it said.