Monetary policy should reflect economic growth



KUALA LUMPUR: The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) believes that domestic monetary accommodation should be adjusted in light of the economy’s strong development prospects.

This is after the MPC increased the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.25 per cent yesterday, meeting economists’ expectations.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said that BNM has indicated that the adjustment in the monetary policy stands that the OPR hikes will be done on a gradual basis.

“In that sense, we believe a 50bps hike in OPR at one go is off the table.



“We believe BMM might want to increase the OPR by another 25 bps in September as the focus now is on addressing the high inflationary pressures as demand conditions have improved amid the high-cost environment,” he told the New Straits Times today.

Putra Business School associate professor Dr Ahmed Razman Abdul Latif said that even though the OPR has been increased to 2.25 per cent, it is still considered lower than the average 3.0-3.25 per cent rate before the pandemic, thus allowing for some room for economic growth this year.

He added that housing and automotive financing costs would be increased, but it would be minimal due to the minimum increase of OPR.

“Nevertheless, the property sector will remain sluggish due to other factors such as a glut in the market, rising construction material costs and weak sentiment among buyers,” he said.



As for raising the rate to rein in inflation, Razman said the low inflation rate at the moment was caused by the government’s intervention of providing subsidies to many essential products and services and not necessarily through raising OPR.

“So, as long as the government provides subsidies, the inflation rate will remain low.

“However, BNM probably anticipated that this subsidy will not continue forever, and the gradual increment of OPR is to prepare for such eventuality of removal of subsidies on several essential products in a few months.

“When this happens, the inflation rate will increase significantly, and BNM would probably need to increase OPR further to contain it,” he said.



BNM’s MPC yesterday increased the OPR by 25 basis points (bps) to 2.25 per cent.

This was the second OPR hike this year after a 25 bps hike in May, from the historic low of 1.75 per cent, the rate the central bank has kept since the beginning of the pandemic in July 2020.

This was also the first back-to-back hike made after the MPC’s meeting in more than a decade. BNM made the last back-to-back hike between March and July 2010.

In a statement today, BNM said the ceiling and floor rates of the OPR are correspondingly increased to 2.50 per cent and 2.00 per cent, respectively.



BNM noted that year-to-date, headline inflation had averaged 2.4 per cent.

While it is projected to remain within the 2.2–3.2 per cent forecast range for the year, the central bank said headline inflation might be higher in some months due mainly to the base effect of electricity prices.

Underlying inflation, as measured by core inflation, is expected to average between 2.0 and 3.0 per cent in 2022 as demand continues to improve amid the high-cost environment.

“Nevertheless, the extent of upward inflation pressures will remain partly contained by existing price controls, fuel subsidies, and the continued spare capacity in the economy.

“The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures,” it added.

NST



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