KUALA LUMPUR: Bank Negara Malaysia is expected to keep the Overnight Policy Rate (OPR) unchanged at 3.0 per cent this year to provide stability in the economy, economists said.
The economists noted that the central bank would need to strike a balance between inflation and growth trajectory, thus leaving the benchmark interest rate status quo.
Universiti Kuala Lumpur's Business School economic analyst Associate Professor Dr Aimi Zulhazmi Abdul Rashid told Business Times that by holding firm on the rates, BNM would provide stability to the economy, benefiting both people and businesses.
This is considering that the country's export recovery is largely dependent on the global economy, he said.
However, he noted there might be domestic factors that could lead to a spike in the inflation rate, requiring the central bank to intervene and hike the OPR.
"Conversely, the economic slowdown possibility triggered by the global economy slowdown or even recession like geopolitics, new viruses, and prolonged high interest rates by the advanced economies may have a direct impact on the Malaysian economy and especially the export markets, hence forcing BNM to cut rates from 3.0 per cent currently," he said.
In the recent Monetary Policy Committee (MPC) meeting, the central bank kept the OPR unchanged at 3.0 per cent, in line with the market's expectations.
Recent indicators point towards sustained strength in economic activity in the second quarter of 2024 (Q2 2024), driven by resilient domestic expenditure and better export performance.
"Going forward, exports are expected to be further lifted by the global tech upcycle given Malaysia's position in the semiconductor supply chain, as well as continued strength in non-electrical and electronics goods.
"Tourist arrivals and spending are also poised to rise further. Continuous employment and wage growth, as well as policy measures, will continue to support household spending," it said in a statement.
The OPR has been unchanged at 3.0 per cent since May 3, 2023.
BNM added investment activity would be supported by the ongoing progress of multi-year projects in both the private and public sectors, the implementation of catalytic initiatives under the national master plans, as well as the higher realisation of approved investments.
The growth outlook is subject to downside risks from weaker-than-expected external demand and larger declines in commodity production. Conversely, upside risks to growth mainly emanate from greater spillover from the tech upcycle, more robust tourism activity, and faster implementation of existing and new projects.
The central bank noted headline and core inflation averaged 1.8 per cent in the first five months of the
year.
"As expected, inflation will trend higher in the second half of 2024, amid the recent rationalisation of diesel subsidies. Nevertheless, the increase in inflation will remain manageable given the mitigation measures to minimise the cost impact on businesses.
"For the year as a whole, headline and core inflation are expected to average within the earlier
projected ranges of 2.0 per cent - 3.5 per cent and 2.0 per cent to 3.0 per cent respectively," it added.
It added that coordinated initiatives by the government and Bank Negara Malaysia (BNM) with government-linked companies and government-linked investment companies, as well as corporate engagements, have continued to cushion the pressure on the ringgit.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said BNM is likely to keep the OPR at status quo for the rest of the year as they need to strike the right balance between inflation and growth trajectory.
On the global stage, he said the global interest rate appears to be on a downward path. Major economies such as Canada, Switzerland, Sweden, and the European Union (EU) have cut their benchmark interest rates recently.
"Soon, the US Fed would join the club; September seems to be the likely timeline.
"Nonetheless, we do not expect the BNM to follow in similar footsteps, as they will assess local factors such as the prospects for the country's inflation, especially when fuel subsidy rationalisation will be implemented going forward.
"In some sense, the wide interest rate differentials with the developed economies would be narrowed, which would increase the appeal of the ringgit. Already, positive reviews from credit rating agencies (CRAs) such as S&P and Fitch Ratings, along with improved assessments by the foreign investment banks in Malaysia, would incentivize more foreign funds to come into the country. This would lift the value of the ringgit and help reduce imported inflation," said Afzanizam.