Another 25bps OPR hike expected in January as November inflation stays elevated

• In 2022, BNM raised the OPR four times at 25bps each, which upped the OPR level from its record low of 1.75% to 2.75%.

KUALA LUMPUR (Dec 24): As robust consumer demand drove November's consumer price index up 4% year-on-year — with core inflation hitting a new high of 4.2% — economists expect the upbeat momentum to continue and result in Bank Negara Malaysia having to raise the overnight policy rate or OPR by another 25 basis points to 3% in its Monetary Policy Committee meeting next month.

While the November inflation print was same as October's, it was a jot higher than Bloomberg's consensus expectation of 3.9%, with food inflation accelerating further to 7.3%, its highest since April 2009, alongside higher prices of restaurants and hotels (7%), recreation services and culture (3.6%), health (1.4%), education (1.5%), and miscellaneous goods and services (2.6%), noted UOB Global Economics and Market Research.

"Given that headline inflation remains elevated and core inflation shows no signs of easing amid ongoing demand side pressures particularly during the year-end festive and holiday period, we expect the OPR to be hiked by another 50bps to 3.25% in 1Q2023, and thereafter staying unchanged at this level for the rest of the year.

"We expect the next 25bps rate hike at the MPC on Jan 18-19, followed by another 25bps hike on March 8-9," said UOB Research economists Julia Goh and Loke Siew Ting in a note.

The duo, who expects headline inflation to stay elevated in the near term before decelerating in 2023, has not imputed any removal of subsidies into its inflation forecasts. It expects 2022 inflation to come in at 3.5% — compared with the Ministry of Finance's estimated 3.3% — and 2.8% for 2023 (MOF estimate: 2.8%-3.3%).

"As the government prioritises measures to relieve the cost of living while electricity tariffs will remain unchanged for households and small businesses until mid-2023, we think the government is mindful of the upside risks to inflation particularly if blanket subsidies are removed. Thus we have not imputed any removal of subsidies into our inflation forecasts for now," it said.

MIDF Research, likewise, expects the January MPC meeting to result in another 25bps hike, and that the new government would keep the current fuel subsidy mechanism status quo at least for another year.

"Reflecting underlying domestic demand, core inflation rate hit a new peak point at 4.2% y-o-y in November 2022 after registering 4.1% y-o-y in the previous month... We opine the strong inflation trend in Malaysia is highly driven by robust consumer demand while indicators for cost inflation have eased in recent months. Job market has been on improving performances, with employment growth above 3% y-o-y for seven straight months since April 2022, while imports of consumption goods and distributive trade sales continued to expand by double-digits at 21.6% y-o-y and 15.2% y-o-y, respectively, in October 2022," it said in a separate note.

RHB Investment Bank Research, meanwhile, kept its OPR forecast range of 3% to 3.5% for 2023, denoting a 25bps to 75bps increase for the year.

It also maintains its headline inflation forecast at 3.4% y-o-y for 2022, with the CPI print softening slightly to 3% for 2023.

In 2022, BNM raised the OPR four times at 25bps each, which upped the OPR level from its record low of 1.75% to 2.75%.

Food inflation seen easing slightly in 1Q2023

Moving forward, MIDF expects Malaysia’s domestic food inflation to decelerate further following the slight correction of global commodity prices, particularly agriculture-related prices and improving supply chain both regionally and domestically.

“With the [government’s] focus on resolving cost of living issues, we believe food inflation will ease slightly starting in the first quarter of calendar year 2023 amid government intervention on selected food prices,” the firm said.

It also noted that the weakening of the ringgit against the US dollar had partially caused the spike in domestic food inflation last month, with Malaysia being a net-food importer.

 “...the ringgit is expected to be on an appreciating path as the Federal Reserve System is signalling for a slower pace of rate hikes from December 2022 onwards," it said, adding a stable government formed post 15th General Election would provide an additional booster for Malaysia’s macroeconomic fundamentals to further support the ringgit’s appreciation.