MNI BNM Preview - July 2022: Gradual Tightening To Continue

EXECUTIVE SUMMARY

• We expect Bank Negara Malaysia to deliver another 25bp hike to the Overnight Policy Rate (OPR) after the Bank kicked off the tightening cycle at the previous meeting. While inflation remains benign on the surface, the true extent of price pressures has been masked by generous subsidies distributed by the government, while the ongoing economic recovery reduces the need for current levels of monetary stimulus.
• Current levels of inflation have kept Malaysia’s real policy rate (Overnight Policy Rate less headline CPI inflation) in negative territory for more than a year now. The simultaneous intensification in hawkish posturing by the Fed is reducing the attractiveness of local assets. Over the longer run, these dynamics are bound to exert further pressure on the ringgit, which already operates near two-year lows vs. the USD.
• A better fiscal/monetary policy mix when it comes to fighting inflation and domestic wage dynamics also point to the need for further tightening.
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