BANK Negara Malaysia (BNM) has raised its overnight policy rate (OPR) by 25 basis points to 2.5%.

This is the third consecutive rate hike announced by the central bank.

It raised the OPR to 2% from 1.75% in May. In July, it was by another 25 basis points to 2.25%.

At its meeting today, BNM’s Monetary Policy Committee (MPC) said the OPR corridor’s ceiling and floor rates have been increased correspondingly to 2.75% and 2.25%, respectively.

The MPC, in a statement, said the global economy continues to expand, albeit at a slower pace, weighed down by rising cost pressures, tighter global financial conditions and strict coronavirus containment measures in China.

“However, global growth continues to be supported by improvements in labour market conditions, and the full reopening of most economies and international borders. 

“Inflationary pressures have remained high, due to elevated commodity prices and tight labour markets, despite continued easing in global supply chain conditions.

“Consequently, central banks are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures. 

“In particular, aggressive adjustments in US interest rates have contributed to a strong US dollar environment.”

It said this has resulted in higher volatility in financial markets, affecting other major and emerging market currencies, including the ringgit.

“Going forward, the global growth is expected to face challenges from the impact of monetary policy tightening in most economies, and pandemic management measures in China. 

“The growth outlook is subject to downside risks, including elevated cost pressures, the potential energy crisis in Europe, and sharp tightening in financial market conditions.”

As for the Malaysian economy, the transition to endemicity and policy measures have contributed to the stronger growth performance in the second quarter of 2022. 

“Going forward, indicators point to continued growth, underpinned by support from private sector spending.

“Labour market conditions and income prospects remain positive, with unemployment and underemployment declining further.”

The MPC added that the reopening of international borders will lift tourism-related sectors. 

“Investment activity and prospects would be supported by the realisation of multi-year projects. 

“Nevertheless, external demand is expected to moderate following softening global growth. 

“Despite the increased volatility in the global financial and foreign exchange markets, these developments are not expected to derail Malaysia’s growth.”

It said that domestic liquidity remains sufficient, with continued orderly functioning of the financial and foreign exchange markets.

“Financial institutions also continue to operate with strong capital and liquidity buffers.

“These will ensure financial intermediation remains supportive of the economy.”

Going forward, the MPC said downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions. 

Year to date, headline inflation has averaged at 2.8%. 

It said headline inflation is projected to peak in Q3 2022 before moderating thereafter, due to dissipating base effects and in line with the expected easing of global commodity prices. 

“Underlying inflation, as measured by core inflation, is expected to average closer to the upper end of the 2-3% forecast range in 2022, with some signs of demand-driven pressures amid the high-cost environment.

“The extent of upward pressures to inflation will remain partly contained by existing price controls, fuel subsidies and the prevailing spare capacity in the economy.”

The inflation outlook, however, it said continues to be subject to domestic policy measures, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions. 

“With the positive growth prospects for the Malaysian economy remaining intact, the MPC decided to further adjust the degree of monetary accommodation.

“At the current OPR level, the stance of monetary policy continues to remain accommodative and supportive of economic growth. 

“The MPC is not on any pre-set course and will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth.”

It added that any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability. – September 8, 2022.