KUALA LUMPUR, Sept 29 — HSBC Global Research foresees Bank Negara Malaysia (BNM) raising the overnight policy rate (OPR) up to 3.50 per cent, as it continues to tighten the monetary policy.

"We expect another 25 basis points (bps) in the November 2022 meeting, taking the OPR to 2.75 per cent by end-2022.

"We also expect three additional rate hikes in the first half of 2023, each at 25 bps, bringing the OPR to its historic high of 3.50 per cent,” it said.

In its Asian Economics Quarterly research report, HSBC Global Research said BNM has struck a balanced tone in its economic assessment, with an optimistic view on its recovery pace but a cautious attitude toward rising inflation.

"BNM has been providing steady guidance that it would continue to normalise its monetary policy in a measured and gradual manner, which we interpret as 25bp rate hikes each time,” it said.

In addition, BNM added new language to its forward guidance that "the Monetary Policy Committee (MPC) is not on any pre-set course and will continue to assess evolving conditions”, suggesting a data-dependent approach, the report noted.

"It will seek indicators on when inflation is likely to peak and growth is expected to moderate to determine when to stop in the current tightening cycle, and at what policy rate level.

"We believe all signs are pointing to continued tightening by BNM,” said HSBC Global Research.

On Sept 8, 2022, at the conclusion of its MPC meeting, BNM increased the OPR by 25 bps to 2.5 per cent.

It is the bank’s third consecutive rate hike, bringing the total increase in the OPR to 75 bps so far this year from a historic low of 1.75 per cent.

On the economy, it said Malaysia’s domestic growth engine is steaming ahead, as the economy normalises and the labour market continues to tighten.

However, HSBC Global Research cautioned that as trade headwinds loom and domestic tailwinds gradually fade — while the domestic recovery will lead to growth in 2022 — it is likely to moderate going into 2023.

"As such, we upgraded Malaysia’s growth to 7.6 per cent (previously 6.6 per cent) in 2022 but cut its 2023 growth to 4.0 per cent (previously 4.3 per cent).

"While Malaysia’s inflation is still not as acute as elsewhere, inflation momentum is, nonetheless, starting to pick up,” it said.

In particular, core inflation has been accelerating as domestic demand continues to recover. Meanwhile, food inflation is rising rapidly, though the momentum is showing some stabilisation, as the government banned some food exports, such as chicken, to contain rising local prices.

"All in all, we upgrade our average core inflation forecast to 2.9 per cent (previously 2.3 per cent) for 2022, approaching the upper end of BNM’s forecast range of 2-3 per cent.

"We also expect higher core inflation of 2.8 per cent in 2023 (previously 2.1 per cent). This will prompt BNM to continue tightening its monetary policy likely until the second quarter of 2023, when inflation pressures recede and growth momentum slows,” it explained.

As for risk, HSBC Global Research said for a trade-dependent economy like Malaysia, the key downside risk is a slowing trade cycle, in particular a potential downturn in electronics. — Bernama