Bank Negara Malaysia or BNM’s premature policy rate normalisation has not helped to stem the depreciation of the ringgit to the US dollar but may harm borrowing costs, hinder business expansion and hamper sustainable economic growth. Strengthening the value of the ringgit were amongst the reasons cited by those defending the 25 basis points hike in the Overnight Policy Rate(OPR) on 3 May by BNM.
It is noteworthy that in a space of three weeks, the value of the ringgit has dropped from RM4.45 on 3 May to RM4.58 today. To date many businesses affected by the drop in the value of the ringgit are still awaiting BNM’s response.
Bank Negara’s main argument for the OPR hike is the need to rein in core inflation and implement policy rate normalisation following full economic recovery from the COVID-19 pandemic. There is genuine concern whether the latest OPR hike will affect sustainable economic growth, making it difficult for Malaysia to repeat the encouraging 5.6% first quarter GDP growth in the second quarter of 2023.
According to S&P Global Market Intelligence, the seasonally adjusted Malaysia Manufacturing Purchasing Managers’ Index (PMI) remained below the 50-point mark separating monthly expansion and contraction, with the index unchanged at 48.8 in April 2023. This warning signal of a subdued Malaysian manufacturing sector at the start of the second quarter of this year is borne out by the April 2023 trade growth falling by 14.5 % year-on-year (y-o-y) to RM198 billion amidst global economic uncertainties.
Hikes In OPR benefited No One Except Improving Profits From Banks.
There is also some confusion about hiking up OPR now to check core inflation, when core inflation had in fact moderated without any hike in OPR, to 3.9% in the first quarter of 2023 as compared to the final quarter in 2022 of 4.2%. Further, there were two interest rate pauses of no hikes in OPR by BNM in January and March 2023, even though core inflation was higher at 4.2% during the final quarter of 2022 as compared to 3.9% in the first quarter of 2023.
There is no reason for BNM to increase the OPR now when the core inflation has been slowly reined in, but instead paused OPR hikes in January and March when the inflation rate was higher. Despite BNM not hiking up the OPR in January and March this year, both headline inflation and core inflation dropped to a 34-month low of 3.4% and 3.8% respectively in March 2023.
The hikes in OPR benefited no one except banking sector profits. Analysts at Hong Leong Investment Bank Bhd (HLIB) estimated that over a one-year forward earnings, a 0.25% rate hike would nudge up the banks' net profit by 3.7 % or slightly more than RM1 billion to RM30.07 billion from RM28.99 billion forecasted earlier. Have banks not earned enough?
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