BENGALURU- Malaysia’s central bank will keep its interest rate steady this week to support a still-nascent economic recovery, a Reuters poll showed, but start tightening policy next quarter to avert rising inflationary pressures.
That accommodative stance was in stark contrast to other major central banks and some of its Asian peers which are hiking interest rates at a much faster rate than earlier thought to rein in stubbornly high inflation.
For now, Bank Negara Malaysia (BNM) enjoys the liberty of keeping rates low as price pressures remain subdued but supply chain disruptions and the ongoing Russia-Ukraine war pose a major risk to that outlook.
The April 28-May 6 poll of 18 economists predicted Bank Negara Malaysia (BNM) to keep its overnight policy rate unchanged at 1.75 percent on Wednesday.
“We think that BNM would want to see a durable economic recovery from the pandemic amid growing downside risks before normalizing policy in early 2H22, despite already having signaled the prospects to withdraw significant monetary support,” said Chua Han Teng, economist at DBS.
But widening interest rate differentials with some regional players and the U.S. Federal Reserve has prompted a handful of participants, 4 of 18 economists to predict a rate hike to come as early as this month.
“In view of expected improvement in economic conditions and upward price pressures, we think BNM is on the cusp of raising the overnight policy rate,” said Julia Goh, senior economist at UOB, who expected a 25 basis point hike in May.
“BNM has also cautioned that keeping interest rates low for a prolonged period could lead to emergence of financial imbalances with excessive risk-taking and unhealthy build-up of leverage.”
However, the survey findings suggested a hike of 25 basis points next quarter to 2.00 percent, followed by another quarter-point hike in Q4, to end the year at 2.25 percent.
Those expectations were unchanged from an April poll.
The BNM now expects the Malaysian economy to grow between 5.3 percent-6.3 percent this year, slightly lower than the previously projected 5.5 percent-6.5 percent, on higher global demand and stronger commodity prices.
Malaysia is net exporter of oil and the second largest producer of palm oil.
Inflation was estimated to average between 2.2 percent-3.2 percent in 2022, a little above the central bank’s target range of 2 percent-3 percent.
Malaysia’s economy returned to growth in the fourth quarter last year with the central bank expecting the recovery to continue this year despite risks of further disruptions caused by the coronavirus pandemic.
Gross domestic product rose 3.6 percent in the October-December period, Bank Negara Malaysia (BNM) said, faster than the 3.3 percent rise forecast in a Reuters poll and up from a 4.5 percent decline in the previous quarter.
Malaysia’s full-year economic performance expanded 3.1 percent in 2021, rebounding from the 5.6 percent drop in 2020, the country’s worst annual performance since the 1998 Asian Financial Crisis.
BNM said Malaysia’s economic recovery was expected to continue in line with improved global and domestic demand.
Risks remain to the downside, however, mainly due to concerns over “severe and vaccine-resistant COVID-19 variants” that could trigger new containment curbs “globally and domestically,” BNM Governor Nor Shamsiah Mohd Yunus told a news conference.
