Source: Media Outreach
KUALA LUMPUR, MALAYSIA – Media OutReach – 4 July 2023 – The Monetary Policy Committee of the Bank Negara Malaysia (BNM) will meet on 5–6 July to make a decision on monetary policy. OctaFX experts anticipate a 25 basis points increase in the interest rate, bringing it to 3.25%. This article delves into the factors influencing this decision and the potential impact on the Malaysian ringgit.
< >The Monetary Policy Committee of the Bank Negara Malaysia (BNM) will meet on 5–6 July to make a decision on monetary policy. BNM is expected to increase the interest rate by 25 basis points to 3.25%
At the most recent meeting, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent, citing the continuing expansion of Malaysia’s economic activity in the first quarter of 2023 after a strong performance in 2022. The economy continues to be driven by resilient domestic demand supported by strong labour market conditions and a stronger-than-expected rebound of China’s economy.
The Monetary Policy Committee noted that core inflation has been on a downward trend in recent months due to the moderating influence of cost factors. However, it anticipates that core inflation will remain high due to sustained demand. Therefore, the committee’s last monetary policy statement indicated the need for further normalisation of monetary accommodation, citing solid domestic growth as a key factor.
According to the latest monthly highlights and statistics, headline inflation in Malaysia continued to decline, reaching 2.8% in May. This decrease was mainly due to non-core CPI components, notably lower inflation in fuel (-0.2 percentage points) and fresh food (-0.1 percentage points). Core inflation also declined slightly to 3.5% (from April’s 3.6%), primarily influenced by lower inflation in communication services.
External factors influenced domestic financial markets, with investors adopting a risk-off approach due to concerns over a potential US Federal Reserve rate hike and a slower-than-expected recovery in China. As a result, the ringgit depreciated by 3.4% against the US dollar.
The renewed hawkish rhetoric from the US Federal Reserve further sets the stage for the weakening of the ringgit. The current US interest rate is 5.25% compared to 3% in Malaysia, and investors believe the gap will widen. When the US offers higher yields, foreign entities tend to convert their Malaysian assets into US dollars and divert their investments to the US market. If Bank Negara Malaysia leaves the rate unchanged, it is expected to accelerate the weakening of the ringgit, which could reach a multi-year high of 4.75 quickly.
However, considering the resilient state of the economy, Bank Negara Malaysia is likely to raise the overnight policy rate (OPR) by 25 basis points to 3.25% at the end of the two-day meeting. This move aims to support capital markets and stabilise the USDMYR exchange rate, which is anticipated to trend lower (with ringgit appreciating) with a target range of 4.50 to 4.57 amid a decreasing interest rate differential between Malaysia and the US Federal Reserve.
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