Bank Negara has decided to increase the overnight policy rate (OPR) by 25 basis points to 2%. This is the first rate hike since July 2020.
Bank Negara said the sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity have partly cushioned the impact of the military conflict in Ukraine and the strict containment measures in China.
Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US. Consequently, several central banks are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures.
The global growth outlook will continue to be affected by the developments surrounding the conflict in Ukraine, COVID-19, global supply chain conditions, commodity price shocks, and financial market volatility.
For the Malaysian economy, Bank Negara said the latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth.
The labour market is further lifted by a lower unemployment rate, higher labour participation and better income prospects.
The transition to endemicity on April 1 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders. Investment activity and prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook.
However, risks to growth remain, which include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding Covid-19.
Bank Negara said headline inflation is projected to average between 2.2% - 3.2% in 2022.
Nevertheless, the central bank said upward pressure on prices would be partly contained by existing price controls 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 on administered prices,” it added.
Over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to provide support to the economy.
“This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability,” the central bank said.
What's Next?
MYR appreciated against the US dollar on 11th May 2022 afternoon in what is seen as an immediate reaction to news that BNM increased the overnight policy rate.
MYR strengthened to 4.3765 against the US dollar.
The central bank’s Monetary Policy Committee (MPC) increased the OPR to 2% from a record low of 1.75% as global inflationary pressures have increased sharply and after taking into account that the sustained reopening of global economy and improvement in labour markets continue to support the recovery of economic activity from the impact of Covid-19-driven movement restrictions.
(Source: The Star , The Edge Markets )
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