OPR likely to stay at 3% until year-end

PETALING JAYA: The overnight policy rate (OPR) is expected to remain unchanged until the end of 2024, say economists.

Bank Negara’s decision on Wednesday to hold the OPR steady was largely in line with expectations.

This marks the fourth straight Monetary Policy Committee (MPC) meeting in which the OPR is kept unchanged following the cumulative 125-basis-point (bps) hike in 2022 to 2023.

In 2021, the central bank increased interest rates in a series of moves, reversing the rate from its lowest point of 1.75% in 2020.

At the beginning of 2023, the OPR stood at 2.75%, a level that remained consistent in most MPC meetings over the past year. This was with the exception of the 0.25-bps hike in the May meeting last year, when the OPR was raised to its current rate of 3%.

Economists said by and large, inflation seems to be contained as it eased to 1.5% in December last year, bringing the annual headline inflation in 2023 to 2.5% from 3.3% in 2022.

AmBank Research said the current OPR level at 3% is accommodative in the present state of inflation and expected economic growth.

“We reiterate our baseline view for the OPR to remain unchanged at 3% until the end of 2024, based on 4.5% gross domestic product (GDP) growth and 3% average inflation forecasts.

“Any alteration to our inflation and interest rate outlook hinges largely on unexpected outcomes concerning the government’s subsidy rationalisation exercise,” it said in a report.

For 2024, it sees headline inflation to be in the range of 2.5% to 3.5%. The wide forecast range primarily reflects the planned subsidy rationalisation measures as announced under Budget 2024.

“Private consumption, which makes up more than 50% of the economy, is expected to grow by 5.7% in 2024, according to the Finance Ministry, and we see the current accommodative interest level as the key driver in sustaining domestic demand.

“Consumption activities had earlier benefited from the ‘revenge spending’ scenario for the most of 2022. Still, the situation has normalised since then, with growth expected to return to its pre-pandemic trend.

“As such, it is crucial for domestic spending to be supported, as export recovery is still facing ongoing external risks,” the research house said.

It said the trend in the Malaysian government bond market is that there has been a downward shift in yields since the start of the fourth quarter of 2023 (4Q23).

“Nevertheless, the market – having clarity for Bank Negara’s interest rate direction, at least till end-2024 of OPR standing at the current 3% level – has also contributed to the steady net buying interest in bonds and interest rate swaps.”

Meanwhile, OCBC Research said it was cautiously optimistic on domestic growth prospects and expected inflation to be manageable this year.

It said there were limited changes to Bank Negara’s outlook on global growth, domestic growth-inflation drivers and the currency compared to its Nov 2, 2023 meeting.

“On the domestic front, the central bank looked through the weaker 4Q23 advance GDP print and remained of the view that 2024 growth will improve, driven by household spending, tourism and broad-based investment activities. This is similar to our view.

“Meanwhile, the inflation outlook remains less certain although it is expected to remain ‘modest’ and broadly reflect ‘stable cost and demand conditions’. The main unknown is domestic policy changes,” added OCBC Research.

It said the timing and mechanism with regards to the implementation of targeted fuel subsidies will be crucial to watch.

On the local currency, it noted that Bank Negara maintained that moves in the ringgit were driven “by external factors, and not reflective of the current domestic economic performance and prospects”.

MIDF Research said the strong US dollar has been the main factor for the depreciation of most currencies, including the ringgit, since early 2022 due to the aggressive interest-rate hikes by the US Federal Reserve (Fed).

Also, contractionary external trade performances dragged the recovery for ringgit in 2023.

Fundamentally, it said, the ringgit is in a good position to strengthen in 2024, as the domestic economy stays on upbeat momentum.

“As a net commodity exporter, the ringgit stands to gain from the supportive global commodity prices and sustained trade surplus.

“Most importantly, the Fed and other major central banks have shifted their monetary stance from hawkish to dovish and will most likely cut rates in 2024.

“We expect US dollar/ringgit to average at RM4.38 and reach RM4.20 by end-2024,” the research house said.