FMT:
BNM in an OPR quandary after hawkish broadside from Fed chairman
A likely 50-basis point hike in US interest rates may force BNM to resume its tightening cycle.
Bank Negara Malaysia surprised by maintaining the OPR at 2.75% in January, after four consecutive 25-basis point hikes in 2022.
PETALING JAYA: US Federal Reserve chairman Jerome Powell has thrown a spanner into the works for Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) as it meets today to determine the direction of the Overnight Policy Rate (OPR).
If the committee members were mulling keeping the OPR unchanged as they did in January, they now have to grapple with the implications of a likely 50-basis point hike in US interest rates, thanks to Powell’s hawkish comments to the US Congress on Tuesday.
PETALING JAYA: US Federal Reserve chairman Jerome Powell has thrown a spanner into the works for Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) as it meets today to determine the direction of the Overnight Policy Rate (OPR).
If the committee members were mulling keeping the OPR unchanged as they did in January, they now have to grapple with the implications of a likely 50-basis point hike in US interest rates, thanks to Powell’s hawkish comments to the US Congress on Tuesday.
Stock markets around the world fell sharply on Wednesday and the US dollar strengthened after Powell raised the possibility of the US central bank returning to large rate hikes to tackle “sticky inflation”.
The Fed will likely need to raise interest rates more than expected in response to recent strong data, Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.
Markets are now pricing in an almost 70% chance of a 50-basis point rate hike at the Fed’s March 21-22 policy meeting, up from about 30% a day ago.
Forcing BNM’s hand
Pacific Research Center of Malaysia principal adviser Oh Ei Sun said BNM is now in a quandary given Powell’s hawkish comments.
The likelihood of a 50-basis point rate hike by the Fed may force BNM’s hand to resume its tightening cycle with a minimum hike of 0.25% at its MPC meeting today, he added.
“Otherwise, capital outflow or capital flight from Malaysia would intensify as hot money would flock to the US to enjoy the higher returns, coupled with less business risk there,” he said.
However, Oh noted BNM would also have to consider the impact of higher borrowing costs if the OPR is raised.
“A hike will especially impact small and medium-sized businesses as well as borrowers who are already enduring a difficult economic environment,” he added.
At its last MPC meeting in January, BNM surprised by hitting the pause button to maintain the OPR at 2.75%, after four consecutive 25-basis point hikes in 2022.
BNM said the decision not to raise the OPR for the fifth time was to allow it to assess the impact of the past cumulative OPR adjustments, given the lagging effects of monetary policy on the economy.
BNM must keep its nerve
However, Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams said BNM must “keep its nerve and hold rates steady”.
He noted that BNM does not generally follow the Federal Reserve when it comes to the OPR.
“It follows its own mandate, which is to maintain price stability and financial sector stability to support sustainable economic growth in Malaysia.
“It is doing a good job at following its mandate and should continue with that,” he said.
Williams pointed out that inflation is slowing and will continue to slow in the coming months.
“Producer and input prices are falling, and oil prices, which are a key driver of costs, are much lower than they were this time last year. So, the inflation outlook is better now,” he added.
Malaysia’s inflation in January 2023 eased to 3.7% compared with 3.8% last December, according to the statistics department.
Center for Market Education (CME) CEO Carmelo Ferlito agrees that BNM is now making decisions more independently of the US scenario, and as such he thinks the central bank may decide to keep the OPR unchanged.
“My personal bet is that BNM will differentiate its position from the Fed for the moment, although they have not closed the door to further hikes.
“Decisions (on the OPR) will be affected by the local status of inflation, and the slowing down of Malaysia’s Producer Price Index (PPI) is a good sign,” he added.
Ferlito pointed out that the true scale of inflation in Malaysia is still very much hidden by persistent price controls and subsidies.
“I think the current level of official inflation will not induce BNM toward another hike,” he said.
The Fed will likely need to raise interest rates more than expected in response to recent strong data, Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.
Markets are now pricing in an almost 70% chance of a 50-basis point rate hike at the Fed’s March 21-22 policy meeting, up from about 30% a day ago.
Forcing BNM’s hand
Pacific Research Center of Malaysia principal adviser Oh Ei Sun said BNM is now in a quandary given Powell’s hawkish comments.
The likelihood of a 50-basis point rate hike by the Fed may force BNM’s hand to resume its tightening cycle with a minimum hike of 0.25% at its MPC meeting today, he added.
“Otherwise, capital outflow or capital flight from Malaysia would intensify as hot money would flock to the US to enjoy the higher returns, coupled with less business risk there,” he said.
However, Oh noted BNM would also have to consider the impact of higher borrowing costs if the OPR is raised.
“A hike will especially impact small and medium-sized businesses as well as borrowers who are already enduring a difficult economic environment,” he added.
At its last MPC meeting in January, BNM surprised by hitting the pause button to maintain the OPR at 2.75%, after four consecutive 25-basis point hikes in 2022.
BNM said the decision not to raise the OPR for the fifth time was to allow it to assess the impact of the past cumulative OPR adjustments, given the lagging effects of monetary policy on the economy.
BNM must keep its nerve
However, Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams said BNM must “keep its nerve and hold rates steady”.
He noted that BNM does not generally follow the Federal Reserve when it comes to the OPR.
“It follows its own mandate, which is to maintain price stability and financial sector stability to support sustainable economic growth in Malaysia.
“It is doing a good job at following its mandate and should continue with that,” he said.
Williams pointed out that inflation is slowing and will continue to slow in the coming months.
“Producer and input prices are falling, and oil prices, which are a key driver of costs, are much lower than they were this time last year. So, the inflation outlook is better now,” he added.
Malaysia’s inflation in January 2023 eased to 3.7% compared with 3.8% last December, according to the statistics department.
Center for Market Education (CME) CEO Carmelo Ferlito agrees that BNM is now making decisions more independently of the US scenario, and as such he thinks the central bank may decide to keep the OPR unchanged.
“My personal bet is that BNM will differentiate its position from the Fed for the moment, although they have not closed the door to further hikes.
“Decisions (on the OPR) will be affected by the local status of inflation, and the slowing down of Malaysia’s Producer Price Index (PPI) is a good sign,” he added.
Ferlito pointed out that the true scale of inflation in Malaysia is still very much hidden by persistent price controls and subsidies.
“I think the current level of official inflation will not induce BNM toward another hike,” he said.
Powell’s hawkish in continuing raising large rate hikes to tackle “sticky inflation”.
ReplyDeleteHe is taking a page out from the past Fed Chairman Paul Volcker in deploying dramatic steps to rein in the runaway inflation that had been sapping the strength of US economy since the mid-1960s.
Without his bold change in monetary policy & his determination to stick with it through several painful years, the US economy would have continued its downward spiral. By reversing the misguided policies of his predecessors, Volcker set the table for the long economic expansions of the 1980s and 1990s.
Despite the current abnormal showings of high scores of the US stock exchange indices, many US industrial conglomerates, especially the high growth high ROI techies, r retrenching employee & reducing development plans.
These industrial giants know what they r doing in preparing for a coming perfect US economic storm.
The current economic data displayed by the various US authorities r abominations & numeric acrobats designed to fool their coommon readers. They r the same phenomenon, business & economic data, tricked Volcker's earlier inactions.
Those hard-nosed CEO know very well about these past facts.
So do Jeremy Powell!
Switch to Yuan loh...
ReplyDelete& speedily seeing yr family heirloom business going down the drain!
Delete