KUALA LUMPUR: Bank Negara Malaysia will most likely leave its key interest rate unchanged on Thursday due to slowing growth momentum and easing inflationary pressures, most economists said.
All but three of 25 economists polled by Reuters between June 27 and July 3 expect Bank Negara to hold its overnight policy rate (OPR) steady at 3.00 per cent - its pre-Covid-19 pandemic level - at the end of the July 6 meeting, following a surprise hike in May.
They also forecast the OPR to be kept there for the rest of the year, marking the end of the central bank's modest tightening cycle as inflation has showed signs of cooling.
Bank Negara surprised the market by raising its OPR by 25 basis points (bps) to 3.00 per cent following its Monetary Policy Committee (MPC) meeting in May, after keeping rates unchanged since January.
Easing inflationary pressures
Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff expects the OPR to stay on hold.
He cited the latest inflation data, which eased to 2.8 per cent in May, as a reason for this expectation.
"Additionally, the recent decision by the US Federal Reserve (Fed) not to raise their interest rate could alleviate pressure on Bank Negara to do so," Ahmed Razman told the New Straits Times.
Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Mohd Afzanizam Abdul Rashid emphasised that in respect of OPR, the consideration has always been about the domestic economy especially on investment and consumption.
Thus far, Afzanizam said Bank Negara has seen the external sector taking a toll on Malaysia's export, while inflation rate has started to come down.
"So there is less urgency to raise the OPR and perhaps it is best to keep it steady at 3.00 per cent throughout the year," he said.
Slowing growth momentum
OCBC senior Asean economist Lavanya Venkateswaran said the bank's baseline is for Bank Negara to keep its OPR steady. This is premised on weaker incoming activity data since May 3 pointing to slower growth momentum in the second quarter of 2023 alongside easing inflationary pressures.
"We take stock of the incoming data since Bank Negara's previous meeting on May 3, in which it surprised with a 25bps hike, to assess the balance of risks to our baseline view.
"To that end, we assign a 70 per cent probability to Bank Negara maintaining its policy rate on July 6 and a 30 per cent probability to a second consecutive 25bps hike," she said.
Venkateswaran said on the domestic front, April wholesale and retail sales growth slowed to 3.2 per cent year-on-year (YoY) and 12.9 per cent from 5.5 per cent and 19.5 per cent in Q1.
On the external front, export and import growth slowed to -9.4 per cent YoY and -7.1 per cent in April/May from 2.8 per cent and 3.7 per cent in Q1.
"That said, there were some pockets of strength with capital goods imports (12.5 per cent in April/May from 0.2 per cent in Q1) and consumer goods imports (1.5 per cent in April/May from 0.9 per cent in Q1) holding up.
"Taken together, growth momentum is slowing and the incoming data is broadly consistent with our forecast for GDP growth to slow to 4.9 per cent YoY in Q2 from 5.6 per cent in Q1," she added.
OPR hike due to worryingly weak ringgit?
Centre for Market Education (CME) chief executive officer Dr Carmelo Ferlito expects a hike in the OPR due to the risk of an economic slowdown and lack of a clear economic direction from the government that weighs more heavily on the local currency.
He stressed that only a better pro-market policy could help strengthen the ringgit, adding that it would signal trust to the markets.
"The potential consequences of a weak ringgit, such as an increase in the food import bill, could prompt Bank Negara to intervene.
"Signs from Europe and China are unfavourable, and the central bank would consider the potential depressive effect of a further rate hike on the Malaysian economy," Ferlito said.
Maybank Investment Bank Bhd (Maybank IB) expects another 25 bps hike in the OPR to 3.25 per cent at the end of the MPC meeting on Thursday.
Maybank IB regional head of equity research Anand Pathmakanthan said this is due to the revised federal funds rate outlook, as well as a worryingly weak ringgit which prompted Bank Negara last week to openly say it will intervene in foreign exchange markets to "stabilise' the local currency.
Investment platform OctaFX said considering the resilient state of the economy, Bank Negara is likely to raise the OPR by 25 bps at the coming MPC meeting.
OctaFX said the potential hike is to support capital markets and stabilise the currency exchange rate.
"If the MPC leaves the rate unchanged, the US dollar and ringgit could hit a multi-year high of 4.75 quickly. However, it is more likely that the rate will be raised, thereby supporting the value of the ringgit," it said.