Malaysia’s overnight policy rate on track to hit 3% in 2023: Maybank Investment Bank

Malaysia’s central bank is expected to raise its key overnight policy (OPR) by 25 basis points this Wednesday (Jul 6) after its next monetary policy committee meeting, said Maybank Investment Bank (Maybank IB) chief economist Suhaimi Ilias at a media briefing on Monday.

His comments are in line with the sentiment of 22 economists in a recent Reuters poll, with all of them projecting that Bank Negara Malaysia will raise rates. If it happens, this would be the first consecutive increase in over a decade, after the last hike by 25 basis points to 2 per cent in May.

Malaysia’s OPR was at 3.25 per cent in January 2018 and was cut to 3 per cent in May 2019. Four consecutive cuts between January and July 2020 saw the OPR fall to a record low of 1.75 per cent.

In the same Reuters survey, nearly half of the economists felt that the OPR would return to its pre-pandemic level of 3 per cent sometime in the first half of 2023.

At the virtual briefing, Suhaimi told reporters that Maybank IB expects to see another interest rate hike of 25 basis points by the end of this year, followed by a further increase of 50 basis points in 2023.

“Our estimation is that every 25 basis points hike will shave real gross domestic product growth by 0.2 percentage point, spread over 12 months,” he said. “The implications of increasing the OPR include the raising of mortgage repayment by 3 per cent.”

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He added that there was also the downside of rising inflation, with Maybank IB forecasting a faster inflation rate of 3.4 per cent this year and 4.1 per cent in 2023, higher than the 2.5 per cent seen in 2021. Suhaimi added that a potential fuel subsidy review by the Malaysian government was likely to push the inflation rate up even higher.

As such, Maybank IB has cut its forecast of Malaysia’s real GDP growth in 2023 to 4 per cent, from its earliest projection of 4.7per cent. Its forecast for 2022 remains at 6 per cent, due to the “sugar rush” effect from the country’s economic reopening.

He was referring to the benefits from Malaysia’s border reopening and a surge in spending due to various Employee Provident Fund (EPF) withdrawal schemes. From April 2020 to May this year, the EPF - the statutory body that managers the compulsory savings plan and retirement planning for private-sector workers - has disbursed more than RM141 billion (S$44.6 billion) under the government’s Covid-related schemes.

“Going forward, EPF will be focusing on rebuilding retirement savings, so we do not see any more such withdrawal schemes,” said Suhaimi.

With the International Monetary Fund progressively cutting its global GDP growth forecast for 2022 to 3.6 per cent, from an earlier projection of 4.9 per cent, Maybank IB estimates that every percentage point drop would reduce the Malaysian economy’s growth by 0.8 percentage point.

Asked if this might affect Malaysia’s credit rating in any way, Suhaimi said the risk of any downgrade within the next 2 years was “very unlikely” as major rating agencies such as S&P have given stable ratings on the country’s outlook.

“This reflects that they are either convinced by or giving the government the benefit of doubt in the mid-term fiscal consolidation plan. It will be interesting to wait for Budget 2023 (to be tabled in Parliament in October this year) to see the messaging by the government and its reform measures to bring down the fiscal deficit,” he said.

Malaysia’s fiscal deficit has widened to 6.4 per cent of GDP in 2021, from 6.2 per cent in 2020, due to higher pandemic-relief spending, according to a report by Fitch Ratings in March this year.