KUALA LUMPUR: CGS-CIMB Research expects Bank Negara Malaysia to adopt a cautious "wait-and-see" approach due to uncertainties surrounding subsidy rationalisation.
Bank Negara, in its first Monetary Policy Committee (MPC) meeting this year, maintained the Overnight Policy Rate (OPR) at 3.00 per cent, the fourth pause in a row, which is in line with CGS-CIMB's forecast.
In the discussions between Bank Negara and economists as well as analysts, a significant focus was placed on the apprehension surrounding impending changes in taxes and subsidies, and the potential consequences these adjustments might have on the economy.
"Thus far, there are indications that consumption will likely be negatively affected on an aggregate basis," it said.
Nevertheless, CGS-CIMB said certain favourable aspects like financial assistance and recoveries in external elements such as electrical and electronics (E&E) could serve as mitigating factors.
"On balance, however, we think it is still unclear whether the negative and positive factors could neutralise each other, making Bank Negara's policy response uncertain.
"Given this scenario, we think Bank Negara would likely employ a 'wait-and-see' stance, rather than its usual preemptive approach.
"Bank Negara may wait for government announcements and assess their impact on the economy before deciding on a policy reaction, if needed," said CGS-CIMB.
The firm noted that any response from Bank Negara could realistically occur only in the latter part of 2024 (2H24), following the implementation of significant tax and price adjustments.
"Regardless, our baseline assumption is that any adjustments will likely be somewhat neutral on the economy, and thus we maintain our view that the OPR will be kept at 3.0 per cent in this year's forecast (2024F).
Bank Negara on Wednesday maintained its conservative stance on inflation for 2024, noting stable cost and demand conditions after the satisfactory performance of headline and core inflation in 2023, which were in line with expectations.
However, Bank Negara expressed caution, stating that the government's assessment of price controls and subsidies could affect demand conditions.
"Anticipating potential price shocks due to subsidy cuts and new taxes, we reassert our position that inflation is expected to gradually rise to 3.2 per cent year-on-year in 2024, compared to 2.5 per cent in 2023," CGS-CIMB said.