KUALA LUMPUR: Bank Negara Malaysia's policy stance is seen by Singapore-based UOB as being on an extended period of hold.
The central bank's overnight policy rate (OPR) has likely reached its peak at 3.00 per cent, UOB said.
It added that policy makers have indicated that they are comfortable with the prevailing monetary policy
setting as being consistent with inflation and growth prospects.
"It is also our base case view that Bank Negara's next move will more likely be towards easier monetary policy.
"However OPR cuts will probably only materialise with a lag after reductions in the US Fed Funds rate has been delivered," UOB Malaysia macro team wrote in a report.
UOB said the tail scenario of an OPR hike remains a low probability event, adding that arguments in support of monetary policy tightening mainly hinge on supporting the ringgit.
But any tweaks at the margin will still leave the ringgit versus US rate differentials near historical wide levels.
In addition, policy makers are well aware of the challenge of pushing against a US dollar tide. Thus, adverse inflation outcomes remain the primary lever through which UOB sees the possibility for higher OPR.
"The MYR IRS (interest rate swap) forwards curve is currently priced in line with our 'extended hold' OPR view.
"Over the past months, investors' expectations of the near-term rates path
have hovered in the neutral zone with a small chance of rate hike.
"Considering the surprise April rate hike by Bank Indonesia, we think the optics will remain in favour of upside tail risk over the downside hedges in the short-term rates space," UOB noted.