SO, just how high can the central bank push the key rate? The Monetary Policy Committee (MPC) last week stated that headline and core inflation are expected to remain elevated in 2023 “amid both demand and cost pressures, as well as any changes to domestic policy measures”.

For CGS-CIMB Research, one sentence that stood out in the statement was “the OPR adjustment would also pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of money policy settings that balances the risks to domestic inflation and sustainable growth”.

As headline and core inflation are expected to remain elevated, how high can the OPR climb in 2023?

For now, most economists project 3.25% by the first quarter of next year, although there are some who do not discount that the key rate could touch 3.5% by end 2023.

If so, borrowers should be bracing for tougher times ahead as the last time the OPR stood at 3.5% was from April 2006 to October 2008.

In fact, 3.5% is the highest the OPR has hit since its introduction as the benchmark interest rate.

Economists think it is highly unlikely that the OPR will be hiked beyond 3.5% next year in view of a global economic slowdown that has been forecast by various quarters.

“Given the risk of global recession in 2023 and the negative external spillover effect from global monetary tightening on the domestic economy via financial and trade channels, Bank Negara Malaysia is unlikely to raise rates beyond 3.5%.

“Bank Negara will assess the lag impact of previous rate increases, which are expected to have a disproportionate impact on consumption and business activities,” says

ACCCIM’s Socio-economic Research Centre executive director Lee Heng Guie.

United Overseas Bank (M) Bhd senior economist Julia Goh, who has forecast another 50bps of increases next year to reach 3.25%, opines that the global challenges and signs of slower growth in 2023 reduce the odds of the OPR being pushed beyond 3.25%.

Sunway University Business School professor of economics Dr Yeah Kim Leng recalls that the OPR in the pre-pandemic days was far higher at between 3.25% and 5%.

While he sees the central bank continuing its rate normalisation next year towards the neutral rate, he says that the probability of the OPR hitting 5% next year is “relatively low” amid moderating global inflationary pressures.

Neutral interest rate is the rate at which monetary policy is neither stimulating nor restricting economic growth.

Yeah says his current inflation forecast for 2023 is 3.5% and cautioned that the forecast is subject to a high degree of uncertainty, especially with the deteriorating global growth outlook and the extent to which high global inflation can be subdued.

Domestically, he observes, the pace and magnitude of the implementation of a targeted fuel subsidy system will also shape the short-term inflation trajectory.

However, SERC’s Lee believes a neutral interest rate is not static but is in fact dynamic and that it varies based on a range of economic and financial market factors.

“Malaysia’s high household debt and a gradual restoration of income level post-pandemic has limited a tighter monetary policy (higher OPR) as it will exert financial pressure on low- and middle-income households/borrowers with high debt gearing,” he points out.

Signs that may prompt a pause in rate hikes

A potential trigger to pause rate hikes, Lee says, could come in the form of a sharp pullback in domestic economic growth or peaking of inflation.

For now, the data remains robust, indicating that rates can continue to be adjusted higher. Goh says the robust data is especially true for consumer spending, owing to pent-up demand, reopening of borders and improved tourist arrivals.

“Despite the global challenges, Bank Negara remains positive on Malaysia’s economic outlook, which suggests that they have room to adjust rates higher.

“In addition, further aggressive adjustments in US interest rates with potentially higher terminal Fed funds target rates could push other central banks, including Malaysia, to lift rates further over the coming months in order to bridge their interest rate gaps with US rates that will weigh on the foreign exchange movement,” she says.

Economists cool on talk of emergency MPC meeting later this year

With the 15th general election around the corner, some wonder whether the central bank may hold an emergency MPC meeting after the polls are concluded to adjust rates.

Economists are cool on the idea as they do not believe the election results would influence Bank Negara’s monetary policy.

“In the current context of Bank Negara, that is in the midst of an OPR hikes cycle, the fourth successive 25bps hike in OPR at the final MPC meeting of this year — and a little over two weeks before the polling date of GE15 — underscores Bank Negara’s independence in its monetary policy decisions,” says Maybank Investment Bank Research in a report.

Lee agrees, pointing to previous crises including the 2008/09 global financial crisis and the recent Covid-19 pandemic where Bank Negara only acted at its regular meetings to unveil carefully choreographed rate moves.