SIXTEEN out of 18 economists expected the overnight policy rate (OPR) to be maintained at 2.75%, but Bank Negara Malaysia (BNM) unexpectedly raised it to 3%.

The reason is to normalise monetary accommodation as the economy was resilient and needed to manage persistent inflation.

The Malaysian economy rebounded strongly, hitting a 22-year high of 8.7% in 2022, but slowing global demand clouded exports outlook. GDP grew only 5.6% in the first quarter of 2023, compared with 7.1% in the previous quarter.

Although growth was 7.1% year-on-year in the fourth quarter of 2022, it contracted by 2.6% on a quarter-on-quarter basis.

Current account surplus dropped to RM4.3 billion in first quarter of 2023 from RM5.7 billion in the same period in 2022. Last year, the current account surplus was at RM47.2 billion, down from RM58.7 billion in the previous year.

Strong performance in 2022 was in part due to withdrawals from the Employees Provident Fund, an increase in minimum wage and cash assistance programmes.

Inflation in the first quarter of 2023 was 3.6%. On a quarterly basis, inflation rose 0.6% compared to fourth quarter 2022 despite existing price controls and fuel subsidies.

Inflation for food and non-alcoholic beverages and transport remained high. They take up two-fifths of the B40 income. Some food items have gone up by 20%.

The problem is, only 20% of food imports show up in the consumer price index basket and Malaysia is a substantial net food importer.

BNM’s 2021 report pointed out that when price pressures are driven by food items, cost of living pressures are disproportionately experienced by lower-income households.

According to the Statistics Department’s Household Income and Basic Amenities Survey Report 2020, a fifth of households from the M40 group have fallen into the B40 group.

Apart from the increase in money supply, the exchange rate is the most prominent element in inflation. The resurgent US dollar, averaged 4.40 and a record low of 4.744, raised import costs.

I have two words for BNM – “be careful” as it may be counterproductive and be mindful of the lagging effects of monetary policy.

Apart from the above, Malaysia’s total trade for April 2023 contracted by 14.5%. Exports decreased for a second straight month in April, registering the largest fall since May 2020.

Further, although the risk of default is low, 25% of household borrowers have a high debt-service ratio (DSR) of 60%. Perbadanan Insurans Deposit Malaysia deemed a safe DSR to be between 20% and 40% of total income.

The normalisation of the monetary accommodation generally means a tightening of financing conditions. There is, however, great uncertainty concerning the future level of interest rates and their long-term equilibrium level.

The Covid-19 pandemic caused disruptions in supply chains and supply of labour, and the Ukraine war also helped to alter the landscape. Prices of raw materials and energy drive up inflation.

In this situation, is it possible or even appropriate to use monetary policy to bring down inflation?

However, prices have stabilised – the European Union gas and electricity markets began to normalise at the end of 2022.

For the banks, I wish they are not bereft of all empathy. They were able to maintain their pre-tax profit levels over the course of the pandemic, with three banks actually increasing their profits in 2020 and 2021 despite a six-month moratorium.

The funding and liquidity profiles of banks are expected to stay sound and supportive of new lending. The system’s net interest margin is broadly stable. Banks can further increase profit through electronic banking.

Given the above, banks should consider targeted moratorium for some of its borrowers.

As for the government, it is important to re-evaluate its degree of interference with the freedom of the domestic banking sector.

Granted, the US Federal Reserve’s recent interest rate hikes have put pressure on BNM to lift the rates for fear of foreign capital flight.

We should pursue vigorously the Asian Monetary Fund idea, first proposed by Eisuke Sakakibara, or “Mr Yen”, during the 1997 Asian financial crisis, that is, setting up a regional network funded by Asian countries to overcome current and future economic crisis.

Revisit the Chiang Mai Initiative and do away with the “IMF link”. We have been under the International Monetary Fund influence for so long and a step towards moving away from the dollar.

However, we do not want to see it replaced by China and the yuan.

There may be other near-term headwinds but Malaysia has proved that it can successfully handle crises.

What say you… – May 22, 2023.

* Saleh Mohammed reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.