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Malaysia – Analysts: Rising inflation may trigger interest rate hike in H2 2022
KUALA LUMPUR, March 31 ― An expected rise in inflation in the second half (H2) of this year may trigger Bank Negara Malaysia (BNM) to raise interest rates, according to research houses.
In a research note today, Public Investment Bank Bhd (PIVB) said it is projecting headline inflation at above 3.0 per cent and core inflation at 2.7 per cent this year.
Besides an increase in global cost factors, especially oil, the investment bank said inflation will also get a lift from a lag impact of the eight fiscal stimulus programme in 2021 and an extended period of low interest rate environment in the first half of 2022.
PIVB said the private-public initiatives to create massive employments this year will also be a boon for inflation.
It was commenting on BNM’s latest annual report in which the central bank forecasts headline inflation hovering between 2.2 per cent and 3.2 per cent in 2022 (2021: 2.5 per cent) and core inflation at 2.0-3.0 per cent (2021: 0.7 per cent).
According to PIVB, headwinds from the global Covid-19 pandemic and nascent economic recovery post-crisis may push BNM to retain its accommodative policy in the first half of 2022. This, it said, will also be driven by the uncertainty from the Russia-Ukraine conflict.
“Nonetheless, an expected rise in core inflation suggests an end to a low interest rate environment, a condition that could trigger an interest rate lift off in H2 2022. Impending hikes will also be driven by a full employment condition in 2022 and a pre-emptive move to avert financial imbalances,” it added.
PIVB also said Malaysia’s transition into Covid-19 endemic stage in April will underpin a full recovery in critical sectors like services and private investment and therefore the turnaround in economic growth in 2022,
“Critically, the huge Covid-19 expenditure will end this year and the fiscal debt ceiling will finally be lowered to pre-crisis levels, a favourable condition for our sovereign rating and by extension, our fiscal financing costs,” it said.
Despite the massive initiatives to lift output, the investment bank said it remains cautious given the risks of Covid-19 outbreak incidences apart from the potential emergence of variants of concern.
“Supply disruptions and global commodity imbalances could also hurt. China’s economic slowdown remains a worry given its spill over effects on our trade,” it added.
Meanwhile, AmBank Research said it believes that BNM would make the first interest rate hike of 25 basis points (bps) sometime in H2 2022.
Yesterday, the central bank said the monetary policy support will need to be balanced against maintaining low interest rates for a prolonged period as it will lead to financial imbalances especially as most central banks are already normalising.
“Should there be too much liquidity that poses risks of potential challenges to the financial system, there are possibilities for the statutory reserve requirement to be raised first by 50 bps, followed by a 25bps hike in the overnight policy rate later in the second half of 2022,” added AmBank Research.
Meanwhile, CGS-CIMB in its research note maintained its forecast of two 25bps rate hikes in H2 2022, noting that BNM has said there may be monetary policy response if price pressure extends to second-round effects. ― Bernama