KUALA LUMPUR (Nov 4): Fitch Solutions, the research unit of Fitch Group, is expecting Bank Negara Malaysia to raise the overnight policy rate (OPR) by 50 basis points (bps) to 2.25% in 2022, from the 1.75% historical low it has kept it at since July 2020, in order to rebuild policy buffers.

In a statement, the group said the rate hike is likely to happen as the central bank will seek to protect the value of the ringgit and maintain its interest rate advantage, especially over the US, which is now likely to begin hiking in 2022 rather than in 2023.

"Meanwhile, inflation is likely to pick up in 2022 and while BNM does not have a numeric inflation target, it is still mandated to maintain price stability and a hike would be timely to stave off higher inflation, which would threaten the recovery in private consumption," it said.

And even if it revises upward as expected, Fitch Solutions said there will be further upside risks if major central banks around the world were to tighten monetary policy even quicker than it currently expects, due to growing, underlying inflationary pressures.

The commentary came after BNM, at its last monetary policy committee for 2021 held on Wednesday (Nov 3), decided to hold the key rate at 1.75%, as widely expected, as it sees risks to the country's growth remains tilted to the downside going into 2022, while the country's inflation is anticipated to remain moderate.

"As economic activity normalises, core inflation is expected to edge upwards but remain benign, given the continued spare capacity in the economy and slack in the labour market. The outlook, however, continues to be subject to global commodity price developments and some risk from prolonged supply-related disruptions,” the BNM said in a statement announcing the unchanged key rate.

The Malaysian government, noted Fitch Solutions, expects growth to range between 5.5% and 6.5% in 2022, against the research house's forecast of 5.5%.

The stronger growth picture will allow the central bank space to hike the OPR, in order to head off inflationary pressures and rebuild policy space, it said.

Fitch Solutions has revised upward its average inflation projection for 2022 to 2.5%, from 1.9% previously, on the stronger economic outlook for the country in 2022, as well as expectations that oil prices are likely to provide slight upward price pressures rather than the disinflationary pressure it had previously anticipated.

Its oil and gas team now expects Brent crude oil prices to average slightly higher at US$71/bbl in 2022, from an estimated US$71.50/bbl in 2021.

"We reiterate our expectations for the economic recovery to lead to higher inflationary pressures in 2022, especially given the relative disinflation that Malaysia experienced, which was unusual given the rise in inflation in other EMs (emerging markets). Indeed, inflation has only averaged 2.3% y-o-y in the first nine months of the year, which was largely the result of a spike in transport inflation between April and June, as a result of very low base effects; inflation outside those months averaged a lower 1.3% y-o-y," it said.

While it adopted the 50bps hike as its base case, the research house said the central bank may raise the OPR by a further 25bps if the economy and inflation were to perform better than expected.

"On the downside, there remains the possibility of another negative shock to the economy from perhaps the emergence of another variant of concern that causes greater strain to the healthcare sector despite the high vaccination rates, or a sharper slowdown in China than we currently expect due to the playing out of risks around financial stability in the real estate sector," it added.

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