BNM raises interest rate to 2%, marking recovery from Covid-19 measures

KUALA LUMPUR, 11 May 2022:

Bank Negara Malaysia (BNM) today reversed interest rate cuts instituted in 2020 as the economy then tanked in response to the economic impact of the US-China trade war and rapidly-worsening fallout of the Covid-19 pandemic.

At its meeting today, the central bank’s Monetary Policy Committee (MPC) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2%. The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.25% and 1.75% respectively.

In a statement, BNM said sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity.

“These 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.”

This prognosis is a far cry from the grim economic outlook in 2020 when BNM announced four rate cuts:

  • Jan 22: 25 basis points,
  • March 3: 25 basis points,
  • May 5: 50 basis points,
  • July 7: 25 basis points.

The last rate cut brought the OPR to 1.75%, which has stayed till today. “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. The unprecedented conditions that necessitated such actions have since abated,” BNM noted.

With this improved outlook, chances are that more rate hikes are impending as BNM noted: “Headline inflation is projected to average between 2.2% – 3.2% in 2022. Given the improvement in economic activity amid lingering cost pressures, underlying inflation, as measured by core inflation, is expected to trend higher to average between 2.0% – 3.0% in 2022.

“For the Malaysian economy, 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 1 April 2022 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders.”

The next MPC meeting is scheduled for July 5-6, followed by Sept 7-8 and Nov 2-3.