KUALA LUMPUR, Nov 4 ― Fitch Solutions ― a research unit of the Fitch Group ― said it expects Bank Negara Malaysia (BNM) to increase its overnight policy rate (OPR) by 2.25 per cent in 2022 in order to protect the value of the ringgit and maintain its interest rate advantage.
The research unit said in a statement that while inflation is likely to increase in 2022, BNM is still mandated to maintain price stability and the increase in the OPR would be timely to stave off higher inflation.
“On November 3, BNM decided after its last monetary policy committee meeting of the year to hold its benchmark OPR at 1.75 per cent, which means our view for the central bank to hold through 2021 has played out.
“In the statement accompanying the decision, BNM expected growth to improve in 2022 despite noting a slew of downside risks to both the global and domestic economies, stating: ‘going into 2022, the growth momentum is expected to improve, supported by expansion in global demand...’,” said the research unit.
Yesterday, BNM announced that it is retaining the OPR at 1.75 per cent at the sixth and final Monetary Policy Committee meeting of the year.
The central bank has kept the policy rate unchanged since July 2020.
BNM said headline inflation is likely to average within the projected range of 2.0 per cent to 3.0 per cent for 2021, having averaged 2.3 per cent year-to-date.
The Fitch unit said that the government’s expected growth of the economy ― ranging between 5.5 to 6.5 per cent ― will allow the central bank space to hike the OPR.
It also announced an updated inflation forecast for 2022 at 2.5 per cent year-on-year, up from 1.9 per cent previously, driven by a stronger Malaysian economic outlook next year as well as rising oil prices.
“To be sure, our Oil and Gas team now expects Brent crude oil prices to average slightly higher at US$72.00/bbl in 2022, compared to an estimate of US$71.50/bbl in 2021.
“We reiterate our expectations for the economic recovery to lead to higher inflationary pressures in 2022, especially given the relative disinflation that Malaysia experienced, which was unusual given the rise in inflation in other emerging markets,” it said.
Fitch Solutions said that there are both positive and negative risks to their forecast, with the positive one being Malaysia had seen an interest rate cut of 125 basis points (bps) or 1.25 percentage points to support the economy,
“We have adopted 50bps in hikes as our base case due to the more uncertain economic picture Malaysia faces compared to 2010 but if the economy and inflation were to perform better than that may see the BNM hike by a further 25bps like they did in 2010,” said Fitch Solutions.
On the downside, it said there remains the possibility of another negative shock to the economy from perhaps the emergence of another Covid-19 variant of concern which may cause greater strain on the healthcare sector despite the high vaccination rates.
Alternatively, it warned of a sharper slowdown of the economy in China involving financial instability in its real estate sector.
