Overnight policy rate expected to hit 3% by 2023

Analysts believe Bank Negara Malaysia (BNM) will further normalise its policy rate going forward and gradually raise the overnight policy rate (OPR) to 3.00% by next year.

The majority believe the rate hikes will continue for the remainder of the year amid rising inflation and that BNM will continue its policy tightening in its upcoming monetary policy committee (MPC) meetings. 

In a note, Kenanga Investment Bank said further rate hikes are expected, largely due to the upward pressure on inflation amid rising food prices and a sustained recovery in domestic demand as reflected in the latest high-frequency indicators such as unemployment rate, retail sales and imports. 

This is also in tandem with the global central bank monetary policy tightening cycle, predominantly to combat rising inflation, it said.

"Nevertheless, it is unlikely that BNM will embark on an aggressive tightening cycle such as a 50 basis point (bps) hike unless the inflation rate overshoots its target range driven by stronger-than-expected domestic demand.

"Likewise, we retain our forecast that BNM will gradually raise the OPR by 25 bps each in the September and November MPC meetings, with the final hike in the first quarter of 2023. Therefore, the policy rate is expected to settle at 2.75% by the end of this year and 3.00% for 2023," it said.

CGS-CIMB Securities said BNM is expected to monitor economic developments going forward, especially if the growth in domestic demand is strong and unfettered amid the large subsidies. 

"In that eventuality, a third rate hike this year could be on the cards. Next year, we price in a further 50 bps in rate hikes, putting the end-2023 OPR at 3.00%," it said.

AmBank Research meanwhile expects BNM to adopt a more aggressive stance in a move to cool inflation and help support the weakening ringgit, not just against the US dollar but also on cross rates.

"We gather that a 50 bps hike one-off seems highly unlikely. We are of the view that the OPR will end at 2.50%-2.75% in 2022, suggesting one to two more rate hikes, with another two hikes in 2023 to 3.00%-3.25%," the research house added.