MIDF Research believes Bank Negara (BNM) will consider another 25-basis-point (bps) rate hike in the second half (2H) of 2023 following the stronger-than-expected growth of the domestic economy.

It said the current focus of BNM’s monetary policy is to ensure sustainable growth so the domestic economy continues to surpass market expectations, among them, distributive trade sales performances, the tight job market, and sticky core inflation.

The Malaysian Industrial Development Finance Bhd (MIDF) said in a note today BNM may optimise its monetary arms by normalising its statutory reserve requirement (SRR) from 2% to 3% this year.

“The SRR rate was reduced to 2% in March 2020. However, the decision will be subject to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.

“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook by way of a persistently high inflation and a further rise in household indebtedness,” the research firm said.

On BNM’s decision to keep the OPR status quo at 3%today, MIDF said the move is in line with market expectations.

BNM said in a statement the global economy remains firm, underpinned by resilient domestic demand amid strong labour market conditions.

Although China’s reopening was expected to spur global growth, the macro momentum in the second-largest economy has slowed, with the global economy facing many downside risks, among them, elevated cost pressures and higher interest rates, said BNM.

It also said central banks across the globe are still embarking on contractionary monetary policy measures as core inflation remains elevated. 

“We do not discount the possibility of another 25 bps rate hike in 2H 2023 given that domestic economic figures point towards an upbeat momentum,” MIDF said.

MIDF said the ringgit is in a good position as the domestic economy remains on an upbeat momentum. As a net exporter of crude petroleum, liquefied natural gas and palm oil, Malaysia stands to benefit from the elevated global commodity prices.

However, it said the ringgit will continue to depreciate as the US Federal Reserve keeps delaying its interest rate pause.

MIDF said China’s weaker-than-expected performances have indirectly affected the local currency, given that exports to China is 13.2% of total exports, which fell by 8.8% year-on-year in the first five months of 2023. – Bernama, July 6, 2023.