Aligning with the consensus among most economists, BMI, a Fitch Solutions company, anticipates that Bank Negara Malaysia (BNM) will maintain the overnight policy rate (OPR) at 3% for the remainder of this year and through 2024. The decrease influences this projection in year-on-year headline inflation, which eased to 2% in July 2023, down from 2.8% in May 2023, as noted by BMI.
Malaysia’s central bank expected to hold rates
With the improved inflationary outlook, Malaysia’s real policy rate has now entered positive territory, a trend historically associated with the conclusion of tightening cycles since 2006. Therefore, BMI believes that the current policy stance is adequate to keep inflation in check, indicating that the central bank will maintain its current position for the time being.
In light of the quicker-than-anticipated price decline, BMI has adjusted its inflation forecast to 1.8%, down from the previous 2%, for the end of 2023. Consequently, the projection for average inflation in 2023 has been revised to 2.6% from the prior estimate of 2.7%, signifying a significant deceleration from the 3.4% seen in 2022.
BMI’s OPR projection is influencing the ringgit’s performance, which has depreciated by 5.9% against the US dollar year-to-date, making it one of the weakest currencies in the region. Swift monetary loosening could potentially exacerbate the downward pressure on the ringgit, particularly given the current global monetary conditions, which remain restrictive.
However, BMI also anticipates that if the ringgit experiences further depreciation, BNM may opt to raise the OPR to maintain a favorable real interest rate differential relative to the US.
Furthermore, BMI suggests there is less urgency for BNM to implement rate cuts soon, given that the central bank’s cumulative 125 basis points increase has been relatively modest compared to its regional counterparts. The expectation is that base effects will continue to be favorable and that underlying price pressures will ease in a weakening economy.
As the Malaysian economy experiences a slowdown in 2023, BMI suggests that the central bank, BNM, will likely adopt a more passive role in addressing the deceleration.
BMI highlights that Malaysia’s economic growth decelerated to 2.9% in the second quarter of 2023 from 5.6% in 1Q2023. That represents the slowest pace since the third quarter of 2021. While an uptick in growth is anticipated in the second half of 2023, BMI’s current forecast for Malaysia’s real gross domestic product (GDP) growth of 4% in 2023 aligns with the lower end of the central bank’s target range of 4%-5%. It falls short of the pre-pandemic average (2015-2019) of 4.9%.
The firm also notes that BNM’s anticipated stronger-than-expected recovery in the electrical and electronic (E&E) sector’s downturn will positively affect the economy. If this rebound proves sustainable, it could alleviate the pressure on the central bank to implement rate cuts.
However, BMI also anticipates that BNM may further raise the OPR to maintain a favorable real interest rate differential relative to the US if the ringgit continues to face depreciation pressures.
Malaysia’s call to action to re-industrialise
Malaysia and the broader ASEAN region have emerged as significant beneficiaries of the supply chain realignment resulting from escalating tensions between the United States and China. Malaysia’s Minister of Investment, Trade, and Industry, Tengku Zafrul Tengku Abdul Aziz, highlighted this trend, emphasizing the need for short-term opportunism in response to businesses seeking a neutral supply chain base.
As the geopolitical divide between the world’s two largest economies widens, Malaysia is positioning itself as an attractive neutral base, aiming to attract major players like Microsoft Corp and Alphabet Inc.’s Google.
In the first three months of 2023, Malaysia secured approved investments totaling RM71.4 billion (approximately S$20.75 billion), representing a 60% increase from the same period in the previous year. Aziz noted that this supply chain realignment directly responds to various factors such as the trade war, tightening monetary policy, and inflation. He emphasized that this shift has greatly benefited the ASEAN region, particularly Malaysia.