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Malaysia: Bank Negara likely to hold OPR
PETALING JAYA: Kenanga Research foresees that Bank Negara has reached the end of its monetary tightening cycle and will keep the overnight policy rate (OPR) unchanged at 2.75% for the rest of the year.
This is predicated on a further downtrend in headline and core inflation to below 3% and an expected global economic slowdown amid tighter financial conditions, which could weigh on domestic growth over the next year.
“We believe that the central bank’s dedication to maintaining both stable prices and sustainable economic growth is coherent with this view.
“However, we reckon there is still room for the central bank to adjust the policy rate, probably with another 25-basis-point (bps) hike to 3%, should an unexpected shock to global commodity prices or global financial markets, as well as changes to local subsidy policy, lead to a resurgence in domestic inflationary pressures,” it said in a note yesterday.
The research house said the central bank is not expected to cut rates in 2023 or 2024.
On the current account balance, Kenanga Research said although it anticipates a slowdown in external activities due to weaker global demand amid the rising risk of a recession, its in-house view aligns with Bank Negara’s projection that the current account balance will remain above 2.5% in 2023.
“In comparison, we forecast the current account balance to expand by 2.6% of gross domestic product in 2023, mainly due to an expected increase in tourism activity and solid demand recovery from China.
“Despite multiple potential risks to the global economy, we believe these factors will positively impact Malaysia’s current account balance,” it said.
On the ringgit, the research house is bullish on the local note in view of the weaker US dollar position due to the Federal Reserve’s (Fed) expected pivot to dovish from hawkish, along with Malaysia’s improving political landscape and economic outlook, which may attract foreign capital inflows and support the local currency.
It said the strengthening of the yuan amid China’s potential robust post-reopening recovery may also help to bolster the ringgit due to its strong positive correlation.
“Once the Fed begins to ease its monetary policy, potentially by 50 bps in the fourth quarter 2023, it could lead to an increase of net capital flows into high-yielding emerging markets, benefiting the ringgit.
“Nonetheless, at this juncture, we still maintain our end-2023 US dollar/ringgit forecast at 4.11,” it said. — Bernama