• Fitch Solutions said while core inflation remains on a firm uptrend, the headline inflation is expected to stay above the central bank’s target at least through the first half of the year, especially with negative real interest rates.

KUALA LUMPUR (Jan 20): Although Bank Negara Malaysia (BNM) unexpectedly kept interest rates on hold at its Jan 19 meeting, Fitch Solutions maintained its forecast that the overnight policy rate will be raised to 3.25% over the coming months. 

Fitch Solutions said while core inflation remains on a firm uptrend, the headline inflation is expected to stay above the central bank’s target at least through the first half of the year, especially with negative real interest rates.

"We believe that above-target inflation and negative real interest rates will prompt further tightening by the central bank to safeguard macroeconomic stability,” the firm said in a statement.

Fitch Solution now expects headline inflation to moderate slightly to an average of 2.9% in 2023 (down from 3.1% previously) versus an average of 3.3% from January to November 2022. 

However, it added, price pressures will likely remain higher than the 2016-2021 average of 1.5%, and BNM’s target of 2.2% to 3.2% forecast range for most of the first half of 2023.

Fitch Solutions said while fuel subsidy and price controls have helped tame Malaysia's headline consumer inflation, it noted that core inflation, which has been on an uptrend since late 2021, ticked up from 4.1% in October to a six-year high of 4.2% in November.

Furthermore, it said, even though economic growth is expected to slow down over the coming quarters as base effects and pent-up demand fade, a robust near-term economic growth outlook will continue to provide room for BNM to hike interest rates and prioritise macroeconomic stability. 

Fitch Solutions said it expects real gross domestic product growth will slow from 5.8% in the fourth quarter of 2022 (4Q2022) to 4.8% in 1Q2023, but that is still higher than the average of 4.6% seen in 2018-2019 before the pandemic. 

Nonetheless, the research house said the risks to its outlook are now slightly tilted to the downside. 

The ringgit has strengthened against the US dollar by more than 2% since the start of the year, and further exchange rate strength could prompt BNM to keep interest rates on hold for longer, it added.

In addition, it said, a sharper-than-expected slowdown in the economy would prompt BNM to turn its focus to supporting growth, while a quicker easing of inflationary pressures would dial back the need for further rate hikes.

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