Malaysia may pause OPR hikes as inflation remains steady

Bank Negara Malaysia (BNM) has indicated that it may maintain its overnight policy rate (OPR) as long as inflation remains under control, according to a Bloomberg report. BNM Assistant Governor Fraziali Ismail stated that the central bank has room for a “conditional pause” on OPR hikes, given that inflation is not “misbehaving.”

“Many central banks have taken the step, us included, to have an intermittent pause, to reevaluate what has been the effects of our measures on the economy. In a way, when we do a conditional pause, let me stress it is a conditional pause — it depends on incoming data as well,” he was quoted as saying.

Fraziali is a member of BNM’s monetary policy committee, which decides on whether to increase, decrease, or maintain the OPR. Changes in OPR affect interest rates charged by banks, with an OPR rate hike resulting in higher interest rates on loans and increased interest rates for fixed deposits and savings.

In July 2020, BNM reduced the OPR to a record-low 1.75% to support the economy during the Covid-19 pandemic. The OPR was maintained until May last year. Since then, BNM has increased the OPR five times, each time by 25 basis points. The hikes occurred in May, July, September, November last year, and in May this year. There were pauses in January and March this year, where BNM made no changes to the OPR rate. BNM’s May 3 hike brought OPR rates back to pre-Covid-19 levels of 3.00%.

BNM Governor Nor Shamsiah Mohd Yunus said the OPR hike in May was a carefully considered move to pre-emptively control inflation in Malaysia before it becomes too late to act, as failure to act now could instead lead to BNM being forced to increase the OPR higher and faster just to lower inflation levels. BNM is forecasting inflation in Malaysia to average between 2.8% and 3.8% this year.

Bloomberg reported that Malaysia’s inflation rate in April has grown at its slowest pace in the last 11 months. Slower inflation would provide BNM with room to ease its monetary policy if economic growth slows. Policymakers have warned that inflation in Malaysia may pick up, affected by factors such as commodity prices and adjustments in government subsidies.

Traders are predicting that BNM will not change its OPR over the next 12 months, but an upcoming reduction in subsidies may renew price pressures, which would affect inflation. Fraziali told Bloomberg that inflation would be affected by subsidy timing. Moody’s Investors Service also cautioned that a heatwave could result in faster inflation in food prices and another round of interest rate increases.