Opr Hike Shows Bnm Is Still Struggling To Tame Inflation

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Persistently high inflation has exacerbated the cost-of-living crisis faced by many Malaysians.PETALING JAYA: Bank Negara Malaysia’s surprise move to raise the overnight policy rate (OPR) may be a tacit admission it has its work cut out to ease the inflationary pressures that exacerbates the cost-of-living crisis faced by many Malaysians.
“BNM has rightly raised the (OPR) to combat these pressures, so the rise in interest rate would both reduce the risk of inflation getting higher and also prevent the economy from overheating,” said Ozer Karagedikli, director of Central Banking Research Centre and professor of practice at Asia School of Business.
Although headline inflation has been low in Malaysia largely due to government subsidies, he said it does not mask the underlying inflationary pressures.
Ads by Kiosked“Part of that pressure comes from the strength in the domestic economy as well as from high global inflation.
“And although global inflation has been falling slower than what we anticipated, it has implications for a small open economy like Malaysia,” Karagedikli said, adding inflation is the key factor for a central bank that has a price stability mandate as part of its monetary policy.
He anticipates the inflation problem will not be going away anytime soon as there is still a lot of excess demand around the world, leading to higher inflation.
“Combined with weakness in [our] currency, that could mean more inflation here,” he told FMT Business.
Malaysia’s headline inflation moderated to a nine-month low in March, falling to 3.4% y-o-y, lower than market estimates of 3.6% y-o-y.
However, core inflation, which measures changes in the prices of all goods and services but excludes food and government-subsidised goods, rose 3.8% in March 2023.
Ads by KioskedBNM resumed monetary tightening after raising the OPR by 25 basis points (bps) to 3% following its Monetary Policy Committee (MPC) meeting yesterday.
The central bank had paused its rate hike cycle at its January and March MPC meetings after raising it by 100bps or 1% last year as inflation surged following the Covid-19 pandemic and the aftermath of the Russian-Ukrainian conflict.
BNM’s rationale
BNM’s OPR statement yesterday went to some length to highlight that its monetary policy stance remains consistent with the outlook of domestic inflation and growth.
“As expected, headline inflation trended lower in recent months on account of moderating cost factors. Both headline and core inflation are expected to moderate over the course of 2023, averaging between 2.8% and 3.8%.
“However, core inflation will remain at elevated levels amid firm demand conditions. Existing price controls and fuel subsidies will continue to partly contain the extent of upward pressures to inflation,” BNM said.
Ads by KioskedCenter for Market Education CEO Carmelo Ferlito concurs that the main factor at play in BNM’s decision to hike the OPR is that inflationary pressures remain elevated coupled with lower unemployment which may push prices up.
“The central banker sees inflation as a (bigger) threat than an economic slowdown,” he added.
On the likely impact of BNM’s decision, he said it depends on how the economic stakeholders interpret the central bank’s moves.
“If they interpret the OPR hike positively (in that BNM is) serious about inflation, they may remain optimistic, and the economy will not suffer.
“However, if they fear economic contraction as a consequence of the measure, then those expectations will be reflected in a slowdown of economic activity,” Ferlito added.
Unintended consequences?
Ads by KioskedWhile BNM’s rationale to increase interest rates is aimed at getting inflation under control, it may well have the opposite effect, according to other economists.
Malaysia University of Science and Technology economics professor Geoffrey Williams said that the rate hike will not be popular amongst borrowers.
He said that raising the OPR will affect the cost of borrowing and in turn make the cost of living more difficult for anyone with loans.
“The effect is therefore not neutral on borrowers, and will have no particular positive effect on inflation, and unlikely to support growth,” Williams noted, adding that banks will be richer as net interest margins improve for them.
Pacific Research Center of Malaysia principal adviser Oh Ei Sun agreed the rise in loan repayment rates would further burden those with housing and car loans.
“Ultimately, BNM had to tame both inflation and prevent capital flight caused by rising US interest rates. It was probably those presumptions which caused the rate to be raised by only 0.25%,” he told FMT Business. - FMT

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