BNM defends recent OPR hike to 3%, saying it was to avoid greater unease of higher inflation

By Priyatharisiny Vasu & Syafiqah Salim 

/ theedgemarkets.com 

12 May 2023

Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus says the central bank wanted to guard against a situation of raising rates too little and allowing inflation to resurge, or raising them too much and causing unnecessary economic weakness.

KUALA LUMPUR (May 12): 

Bank Negara Malaysia (BNM) defended its recent position of increasing the overnight policy rate (OPR) to 3% amid widespread misconception, saying the central bank wanted to avoid keeping the rate too low for too long when economic growth was firm. 

BNM governor Tan Sri Nor Shamsiah Mohd Yunus said at the briefing on the first quarter of 2023 on Friday (May 12) that the central bank wanted to guard against a situation of raising rates too little and allowing inflation to resurge, or raising them too much and causing unnecessary economic weakness. 

“I must also correct the perception that we want growth to be slower. That is certainly not true. Which one is more kejam (brutal)? [A rise in the] OPR, or if our inflation goes out of control? 

If our inflation level heats up, all our purchasing power will be impacted regardless of whether you have a loan or not,” the governor said. 

She added that prolonged low interest rates that are not aligned with the health of the economy could have damaging effects, such as overspending and overborrowing. 

 “This could push up prices even more. When that happens, all of us will be affected, especially the poor and vulnerable,” Nor Shamsiah said. 

 It can also encourage excessive risk-taking, and speculative investments to get higher returns, and increase chances of financial scams. 

 She added that the central bank wants economic growth to be on a sustainable trajectory, and as such, it is focused on ensuring the long-term impact of its policy rate decisions. “We want it to be sustainable, not just for today, but for months and years to come. We do not want to have a situation, where we just look at today’s growth numbers, but further down the road, it's not sustainable, where it leaves us in high inflation and even a recession. That is not what we are here for,” Nor Shamsiah said. 

 On May 3, BNM raised the OPR by 25 basis points (bps) to 3%, as the central bank believed the global economy continued to be driven by resilient domestic demand. The rate hike, after two consecutive pauses in early 2023 at 2.75%, came as a surprise after most economists predicted that the central bank would maintain the OPR to further assess the impact of four straight increases in the key rate last year that raised it by a cumulative 100 bps. 

 Inflation remains sticky 

 Nor Shamsiah said although headline and core inflation is expected to moderate over the course of 2023, core inflation would remain elevated. 

 Elevated underlying inflation has been more prolonged than in past episodes, the governor said, adding that it was partly owing to a strong recovery in domestic demand. 

 “While core inflation moderated to 3.9% during the [first] quarter, compared with 4.2% in the immediate preceding quarter, it remained elevated relative to the historical norm of around 2%,” she said. Core inflation is more indicative of demand pressures, she said, adding that both headline and core inflation will remain within 2.8% to 3.8% for the year as a whole. 

 “Even as cost has begun to moderate, strong economic activities have continued to generate demand-driven pressures, which have kept core inflation elevated,” the governor said. 

 She said higher core inflation could be observed beyond conventional demand indicators, such as retail trade and credit card spending data. 

 Existing price controls and fuel subsidies will be continued to partly contain the extent of upward inflationary pressures, according to her. 

 “The balance of risk to the inflation outlook is tilted to the upside, and remains highly subject to any changes in domestic policy, financial market developments and global commodity prices,” she said.

https://theedgemalaysia.com/node/666714