Bank Negara Malaysia’s dovish stand will likely continue for most of 2022, as the central bank stays clear from tightening its monetary policy despite hawkish US Federal Reserve signals to raise interest rates soon to fight inflation. Pix by MAHZIR MAT ISA
Bank Negara Malaysia’s dovish stand will likely continue for most of 2022, as the central bank stays clear from tightening its monetary policy despite hawkish US Federal Reserve signals to raise interest rates soon to fight inflation. Pix by MAHZIR MAT ISA

KUALA LUMPUR: Bank Negara Malaysia's dovish stand will likely continue for most of 2022, as the central bank stays clear from tightening its monetary policy despite hawkish US Federal Reserve signals to raise interest rates soon to fight inflation.

Economists said Bank Negara might keep its record-low Overnight Policy Rate (OPR) in tact, at least until the fourth quarter of the year before a possible 25 basis point (bps) hike.

Bank Negara on Thursday decided to maintain the OPR at 1.75 per cent, saying that average headline inflation was likely to remain moderate this year as the base effect from fuel inflation dissipated.

The country's headline inflation had averaged 2.3 per cent for the period January-November 2021, said Bank Negara.

"The stance of monetary policy will continue to be determined by new data and their implications on the overall outlook for inflation and domestic growth," it said in a statement issued at the end of its two-day Monetary Policy Committee meeting.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said Bank Negara appeared to be comfortable with the state of the economy.

"The reopening of the economy will continue to occur amid effective vaccination rollout. Having said that, Bank Negara continues to put caveat in its assessment by saying the downside risks remain clearly visible and policy decision will hinge upon the incoming data."

He added that catalysts for higher inflation would be from supply distruption and improving demand condition.

But the resource slack in the economy in particular the labour market would put a lid on inflationary pressures.

"In a nutshell, its neutral-to-positive assessment based on today's communique. As such, we are maintaining our call that the OPR would be raised by 25 basis points in the second half of 2022," Afzanizam told the New Straits Times.

Manulife Investment Management Asia macro strategy head Sue Trinh expects Bank Negara to hold off policy tightening in 2022.

This would be consistent with the general view that Asia would follow the global policy normalisation cycle, she said.

Maybank Investment Bank Bhd chief analyst Suhaimi Ilias said the OPR would likely continue to stay at a record-low of 1.75 per cent before a 25bps hike to 2.00 per cent in the fourth quarter of the year.

Putra Business School associate professor Dr Ahmed Razman Abdul Latif said there were various reasons why Bank Negara decided to maintain the OPR. This was despite the Consumer Price Index and inflation rate having increased to 3.3 per cent.

"This might indicate the possibility that the economy is overheating. However, it's not necessarily so given the fact that the economic growth of the country has yet to really ride up exponentially, meaning our economic recovery is still sluggish.

"Even though the number of unemployed person has dipped below 700,000, the figure is still higher than pre-pandemic. So in conclusion, the indicator whether our economy is overheating, is still not there."

Ahmed Razman said economic theory indicated that when the economy was overheating, it was a good justification to increase interest rate.

"But in this case, Bank Negara still feels that our economy still has room to grow without becoming overheated and for that reason, there is no need to increase the OPR at the moment.

"There will be a possibility that the OPR will be increased in the second half of the year because we are still in the recovery stage. Increasing the OPR too quickly might stunt the economic recovery," he added.