Economists divided on BNM's next OPR decision

• In its recent OPR announcement, BNM highlighted that Malaysia’s GDP measure for 2023 indicates an improvement in the nation’s economic activity. This is supported by an expected recovery in electrical & electronics exports. BNM also stated that Budget 2024 will further stimulate economic activity.

KUALA LUMPUR (Nov 3): While Bank Negara Malaysia's (BNM) decision to keep the overnight policy rate (OPR) unchanged at 3% in its final monetary policy committee meeting for the year was well expected by economists following Malaysia's positive economic growth, they, however, appear divided on the central bank's stance going forward.

TA Securities predicts that BNM will likely maintain the OPR at 3% throughout 2024. This prediction is based on the premise that Malaysia’s economy has not yet regained its strong momentum and continues to face potential risks.

The research firm suggests that implementing an additional interest rate hike could challenge the country's growth momentum for the year 2024.

Echoing this sentiment, CGS-CIMB also maintains its stance that the OPR will remain at 3% in 2024. It firmly believe that BNM remains confident in the performance of the ringgit, thanks to the country’s robust capital and liquidity buffers, despite considering the aggressive monetary policy tightening in the US.

Contrarian view

However, HLIB Research presented a contrasting view and forecast that BNM might increase the OPR by another 25 basis points in 2024.

This prediction is primarily driven by potential changes in domestic policies on subsidies and price controls, as well as fluctuations in global commodity prices and financial market developments.

Malaysia's inflationary pressure  

On inflation, BNM has projected that Malaysia’s Consumer Price Index (CPI) will remain modest in 2024, although it acknowledges that the government’s review of price controls and subsidies could affect demand conditions.

CGS-CIMB anticipates a potential rise in inflation in Malaysia due to the implementation of targeted subsidies, which the government has already begun.

Earlier this month, the government withdrew the chicken subsidy and price controls, with more measures  anticipated, including a revision of electricity tariffs (possibly in December 2023) and adjustments to subsidised fuel prices (possibly in 2Q2024). 

“We maintain our CPI projection at 2.8% for 2023F and 2.5% for 2024F pending further updates on the government’s subsidy rationalisation measures,” said CGS-CIMB. 

TA Securities sees potential for inflation to rebound in the final quarter of 2023, possibly surpassing 2% again.

“Several factors could underpin this, including the diminishing impact of the base effect, rising commodity prices, particularly Brent Crude Oil, the continued weakening of the Malaysian ringgit and the ripple effect from subsidy rationalisation,” the research house said. 

For 2024, TA Securities expects inflation to remain around current levels, with its base case projection at 3.1%.

While economists have differing views on BNM's OPR decision moving forward, they concur that Malaysia’s inflation outlook for 2024 will largely depend on changes in domestic policies, particularly those related to subsidies and price controls. 

Additionally, global commodity prices and developments in the financial markets will also significantly influence the inflation outlook.

Economic outlook for Malaysia

In its recent OPR announcement, BNM highlighted that Malaysia’s GDP measure for 2023 indicates an improvement in the nation’s economic activity.

This is supported by an expected recovery in electrical & electronics exports. BNM also stated that Budget 2024 will further stimulate economic activity.

However, BNM remains cautious about Malaysia’s 2024 economic outlook, noting that the government’s review of price controls and subsidies will impact demand conditions.

HLIB Research projects that Malaysia’s GDP growth will remain modest at 3.8% year-on-year (y-o-y) for financial year 2023 (FY2023) and rise to 4.8% y-o-y in FY2024.

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