KUALA LUMPUR (June 22): Bank Negara Malaysia is under increasing pressure to raise rates faster in the face of an aggressive U.S. Federal Reserve and a growing consensus that global food and Energy will continue to stay high for longer, with any potential supply shocks deemed capable of pushing prices and inflation even higher.
In a Wednesday note, UOB Global Economics and Market Research warned that the key finding is that “doing nothing or moving too slowly” could sow the seeds of more persistent and higher inflation in the future, with effects more negative on demand and the economy.
“Rate hikes should then also be sharper and steeper in this scenario. It may also be necessary to act more quickly now in order to have enough political reserves for the next recession (when it happens) A delayed policy response by BNM relative to its peers could also risk excessive ringgit volatility in 2H22 (the second half of 2022),” wrote its economists Julia Goh, Enrico Tanuwidjaja and Jasrine Loke.
They also noted that more central banks have already made back-to-back or larger-than-expected rate hikes since May 2022, as a more persistent inflation outlook has forced more central banks to accelerate their rate hikes. in order to tame long-term inflation expectations and strengthen their credibility.
Aggressive policy tightening, fallout from the Ukraine crisis, Covid-19 measures in China and tighter global financial conditions are now fueling global recession fears.
“As such, we believe BNM should weigh how these factors might affect domestic economic conditions as the rapidly narrowing rate differential with the US puts increased pressure on capital flows and the ringgit.” , they wrote.
Although the BNM does not adopt an inflation targeting framework and headline inflation remains manageable – largely due to government subsidies in place – economists have noted that the rising cost of the government subsidies and supply distortions due to price controls have already caused the government to reassess the subsidy mechanism.
On Tuesday, the government announced the removal of subsidies for bottled cooking oil and price caps for chicken and eggs from July 1, to ensure adequate food supplies in the market and stabilize prices. longer term.
Room for a 50 basis point increase in the OPR before the end of September
Meanwhile, improving prospects for domestic growth following a full reopening of the country’s economy and borders in April-May are also increasing underlying demand price pressures, wrote economists.
“Given the ongoing domestic recovery and the latest developments, it is possible that BNM will follow up with another 25 basis point rate hike at the July and September meetings,” they added.
BNM, which just raised the key rate by 25 basis points to 2% in May – its first hike since January 2018 – previously sounded that the removal of monetary easing would be “measured and gradual”.
But he also acknowledged that the negative output gap, a potential indicator of rate adjustments, was closing faster than expected, economists said.
“While we expect Malaysia’s growth momentum to remain robust this quarter and next, we think BNM could consider advancing rate hikes to limit inflation risks as growth remains decent. Our updated OPR projections are 2.5% by the end of 2022 and 3% by the end of 2023. Even after projected 75 basis point hikes for this year, monetary policy would remain accommodative as it does ‘reverse only part of the 125 basis point rate cut during the pandemic,’ they said.
Malaysia’s core inflation rose for the seventh consecutive month to 2.1% in April, which the trio said is its highest level since January 2018 and above the long-term average of 1 .4%.
It is also closer to headline inflation of 2.3%, an upward trend which the trio expect to continue in 2H22 given continued global food shortages, high commodity prices, end of favorable base effects and currency weakness, they wrote.
In view of the above, BNM has forecast that core inflation or underlying inflation will increase by an average of 2% to 3% in 2022, which economists say is closer to its target for growth. headline inflation from 2.2% to 3.2%. The UOB estimate is 3%.
“It should be noted that the current inflation projections have not taken into account potential upward revisions to other items subject to administered prices (such as flour, sugar and cooking oil) or adjustments to electricity and water rates as well as fuel subsidiaries that will further exacerbate upside risks to the core inflation forecast.
“If these price revisions materialize, it would further intensify the second-round effects of inflation,” the economists said.
Economists expect the US Fed to raise rates further to an upper bound of 3.5% by the end of 2022, and another 4% by the end of 1Q23. “Emerging market central banks will start to follow suit or risk falling behind in the spread with the US interest rate,” they added.