FMT: To pivot, or not to pivot — a Bank Negara dilemma
BNM has increased the overnight policy rate four times this year to 2.75%.
PETALING JAYA: With headline inflation likely to have peaked at 4.5% in the third quarter, Bank Negara Malaysia (BNM) now has the option of pivoting from its rather aggressive policy of hiking the overnight policy rate (OPR).
If that happens, it may well bring a sigh of relief to many businesses and Malaysians who have borne the brunt of four rate hikes as the central bank sought to rein in inflation and stabilise the depreciating ringgit.
On Nov 3, BNM increased the OPR by another 25 basis points (bps) to 2.75% at its final monetary policy meeting for the year. All four increases have been by 25bps.
Last week, BNM governor Nor Shamsiah Yunus said Malaysia’s headline inflation likely peaked for the year at 4.5% during Q3.
The anticipated easing of inflationary pressures going forward stems from a moderation in global commodity prices and easing supply chain disruptions, BNM said.
Malaysia’s situation appears to mirror that of the US, where inflation also seems to have peaked. Its October consumer price index (CPI) report showed prices rose 7.7% year-on-year, well below the peak in June of 9.1%.
This raised hope the US Federal Reserve (Fed) will become less aggressive on interest rate hikes. Investors anticipate moderating inflation may prompt the Fed to ease or potentially even reverse its steep 0.75% rate hikes.
In other words, a “pivot” from tight monetary policy to a loose monetary policy may well be on the cards.
Given the Fed may potentially pivot in coming months, will BNM see the easing of inflation as an opportunity to do likewise?
When announcing the Q3 gross domestic product growth figure last week, Nor Shamsiah gave little hint on the direction of interest rates moving forward.
“In formulating monetary policy decisions, the monetary policy committee (MPC) is not on any pre-set course. This means that the MPC will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth.
“Any future OPR adjustments will continue to be done in a measured and gradual manner to support sustainable economic growth in an environment of price stability,” she said.
At the current OPR leveI, monetary policy continues to be “accommodative and supportive of economic growth”, Nor Shamsiah added.
Standard Chartered’s global research team said Malaysia’s strong economic growth supports its call for BNM to extend its rate-hiking cycle. “We expect BNM to hike again in January, increasing the policy rate to 3%. This will reverse the previous Covid-induced rate cuts.
“Thereafter, we expect a pause in March, before a final 25bps hike in May premised on a potential subsidy change in H2 2023 and if domestic demand remains firm,” it said in a recent report.
Malaysian Institute of Economic Research (MIER) senior research fellow Shankaran Nambiar noted that inflation in the US could have reached its peak. “At least it is not increasing at the pace at which it used to. This is likely to prompt BNM to relax its OPR policy,” he told FMT Business.
“Judging from what’s happening in the US, BNM may take a softer approach. And that will prepare the way for a monetary policy environment that may be better able to handle a weaker economy in 2023,” he added.
Shankaran said the increased interest rates were a cause of concern for Malaysian businesses, especially those in the SME sector. “Naturally the cost of credit went up and that too at a time when businesses were recovering from the pandemic and the lockdowns,” he said.
Malaysia University of Science and Technology economist Geoffrey Williams agreed that headline inflation has likely peaked and global inflation is also at or near its peak.
“Overall, there is less pressure to raise rates further unless government spending is too high as was planned in Budget 2023,” he told FMT Business.
“There is now scope to reduce interest rates if growth slows too much but a pause in interest rate changes is preferable now,” he added.
However, Williams does not think BNM will take the cue from the Fed in any potential pivot. “BNM follows its own domestic mandate and does not follow the Federal Reserve despite what many people think,” he added.
He pointed out BNM’s strategy is based on its mandate to ensure price stability and financial stability to support sustainable economic growth.
“It has taken advantage of the higher growth led by very high government spending, EPF withdrawals and opening up of the economy to normalise interest rates in line with their long-term average of 2.5% to 3%,” said Williams.
Given that the OPR now stands at 2.75%, the debate within the halls of the central bank may well be, “To pivot, or not to pivot?”
“We have already seen a moderation in headline inflation to 4.5% in September from 4.7% in August. We expect headline inflation to continue moderating going forward upon dissipation of the base effect,” she added.
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