Fitch Group’s research unit, Fitch Solution, sees Bank Negara Malaysia (BNM) increasing its overnight policy rate (OPR) by 2.25% next year to protect the ringgit’s value and maintain its interest rate advantage.
It noted that while inflation is expected to increase in 2022, the central bank is still mandated to maintain price stability and the hike in the OPR will be timely to fend off higher inflation, reported Malay Mail.
“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,” said the research unit.
“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’.”
The central bank retained its OPR at 1.75% at this year’s sixth and final Monetary Policy Committee meeting.
The policy rate has been kept unchanged by BNM since July last year.
BNM believes headline inflation will average within the projected range of 2% to 3% this year, after averaging 2.3% year-to-date.
Fitch Solution said the government’s expected economic growth of between 5.5% and 6.5% will allow BNM space to increase the OPR.
It also revised its inflation forecast for 2022 upward to 2.5% year-on-year, from 1.9% previously, on the back of a stronger economic outlook for Malaysia in 2022 and 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,” said the research unit as quoted by Malay Mail.
“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.”
The Fitch unit pointed that there are positive and negative risks to their forecast – the positive being Malaysia witnessing an interest rate cut of 1.25 percentage points or 125 basis points (bps) 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,” it said.
The downside, however, is that there is still the possibility of another negative shock to the country’s economy perhaps from the emergence of a new COVID-19 variant that could cause greater strain on Malaysia’s healthcare sector despite high vaccination rates.
It also warned of a sharper slowdown in China’s economy due to the financial instability of its real estate sector.
Check out these latest project reviews today! Or read our helpful Guides to learn all about the various property buying, selling and renting tips!
