BNM likely to hold OPR for remainder of 2024
Economists believe Bank Negara Malaysia (BNM) will likely hold the overnight policy rate (OPR) steady at 3 per cent for the remainder of 2024 as they see limited necessity and justification for the central bank to shake up the current status quo.
The above forecast comes following the conclusion of the recent BNM Monetary Policy Committee (MPC) meeting on January 23 to 24 which ended with the committee deciding to maintain the OPR at 3 per cent for the fourth consecutive period.
According to the accompanying Monetary Policy Statement (MPS), the rationale behind this ‘OPR pause’ is based on the belief that the current upside and downside risks to both growth and inflation are balanced.
For 2024, BNM is expecting inflation to ‘remain modest’ while expecting upside risks to domestic growth to come from “greater spill over from the tech upcycle, strong-than-expected tourism activity and faster implementation of existing and new projects.”
While the recent MPS has appeared to have turned slightly more optimistic, it also acknowledged that downside risks for domestic growth would stem from weak global demand and declines in commodity output.
While global trade conditions are plagued with downside risks of escalating geopolitical tensions, the MPC still sees global trade growth to be supported by exports, domestic expenditure, employment and wage growth.
Similarly, while the monetary policy tightening cycles seem to have peaked for most central banks, global monetary policy stance is still expected to remain tight in the near-term as inflation rates remain sticky in most large economies.
In an economic viewpoint report, economists at Kenanga Investment Bank Bhd (Kenanga Research) guided that based on these factors, there appears that there is “limited necessity and justification for BNM to alter the OPR in 2024.”
They add that this would rein in any hawkish tendencies and allow BNM the leeway to focus on fortifying financial stability while navigating external uncertainties.
Economists from RHB Investment Bank Bhd (RHB Research) also opined that the wide official inflation range of 2.1 to 3.6 per cent should provide sufficient room for potential upside risks from the policy changes.
They note that current inflation risks are cushioned by steady food prices supported by the continuation of food subsidies and price controls for staple food items, but this may see some downside risk from the impending fuel subsidy reform.
However, as the RON95 petrol reform is expected to roll out only in the second half of 2024, RHB Research reaffirms their forecasts of the OPR maintaining status quo in 2024.
“BNM might hold its benchmark rate until there is greater clarity over the timing and magnitude of fuel subsidy reform, while accessing the lagged impact on overall inflationary trajectory and economic momentum,” they said.
For 2024, Kenanga Research opined that inflation will sit around 2.7 per cent while RHB Research reckons that it will settle in at around 3.3 per cent.
Sharing a similar view, MIDF Amanah Investment Bank Bhd (MIDF Research) believed BNM will be incentivised to keep the OPR’s status quo for 2024 as a policy rate normalisation would be needed in the medium-term to avert risks that could destabilise the future economic outlook such as a persistently high inflation and a further rise in household indebtedness.
For Malaysia’s gross domestic product (GDP) in 2024, both Kenanga Research and RHB Research are expecting the local economy to expand at 4.9 per cent and 4.6 per cent, respectively.
This is a higher rate than the estimated 3.8 per cent registered in 2023 and also in line with the Ministry of Finance’s own forecast range of 4 to 5 per cent.