(Bloomberg) -- Malaysia is expected to maintain its benchmark interest rate at a historic low Thursday, as it awaits signs of a more sustained economic recovery amid heightened global tensions.
Bank Negara Malaysia will keep the overnight policy rate at 1.75% at its second policy meeting of the year, according to all 22 economists surveyed by Bloomberg. While the bank has held since July 2020, economists are expecting a rate hike by as much as 50 basis points in the second half of this year.
The situation in Malaysia showed signs of improvement since the last meeting in January, before Russia's invasion of Ukraine added new risks to the global economy and commodities prices.
The economy swung back to growth in the fourth quarter, and the nation has been preparing to reopen its borders after two years. Most virus curbs have been done away with thanks to a high vaccination rate -- more than 62% of adults have received booster shots.
“We view prolonged global supply bottlenecks and high commodity prices, in light of the recent geopolitical crisis, as factors which could affect Malaysia's export and manufacturing activities in the coming months,” analysts at MIDF Research wrote in a report Wednesday.
What Bloomberg Economics Says...
“BNM this month signaled it prefers to see some traction in the recovery before it starts lifting the policy rate. We still expect BNM to begin its rate hike cycle in July, but the Ukraine crisis significantly increases the risk of a move as soon as the May meeting.”
-- Tamara Mast Henderson, Asean economist
For the full report, click here
Here's what to watch for in Thursday's policy statement at 3 p.m. local time:
Growth Risks
Malaysia's central bank is set to outline its growth outlook and whether risks remain tilted to the downside. Higher commodity and energy prices were among the risks Bank Negara highlighted last month -- and prices have already sky-rocketed the past week due to the Ukraine war.
Finance Minister Zafrul Aziz on Wednesday said there was need for continued policy support, as he listed growing threats to emerging markets, including from the Federal Reserve's hawkish shift and China's slowing economy.
Easy Stance
The central bank may reiterate that the policy stance will remain accommodative and be data-driven. Bank Negara Governor Nor Shamsiah Yunus last month cautioned against a “premature withdrawal” of monetary policy support.
Still, the central bank would be justified to hike rates as soon as the second quarter, economists at United Overseas Bank said, departing from the majority view. They cited build-up of domestic inflation pressures, sustained growth momentum and more aggressive Fed tightening as factors.
“A sooner-than-expected rate increase will also help to preserve some room between Malaysia's overnight policy rate and U.S.'s Fed Funds rate, and maintain exchange rate stability,” UOB analysts Julia Goh and Loke Siew Ting wrote in a report.
Inflation Outlook
Malaysia's inflation is most likely to remain modest, with higher commodities prices caused by the war in Ukraine expected to not last long, according to analysts at Marc Ratings Berhad.
“We expect the government to resort to short-term policy moves by suppressing rising prices via subsidies and other price control mechanisms,” they wrote in a research note Monday.
The government forecasts inflation at 2.1% in 2022, while the central bank has yet to release its estimates for the year. Headline inflation eased to a four-month low of 2.3% last month on fuel subsidies and base effects.
©2022 Bloomberg L.P.
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