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  • Writer's pictureBait Al-Amanah

The downside risks of BNM’s OPR pause vis-à-vis the ringgit.

Updated: Apr 10, 2023

By Benedict Weerasena, Research Director of Bait Al Amanah.


Overall, it is a good decision for BNM to adopt a wait-and-see approach, to continue to assess the delayed impact of the past 4 OPR hikes in 2022. This is necessary considering the lag effect of monetary policy. It is also wise for BNM to avoid a monetary policy that would be too restrictive, considering how our domestic economic growth is expected to moderate this year.


However, there are a number of downside risks to this move. With the US Federal Reserve showing a higher likelihood of increased interest rate hikes, the widening rate differential will reduce the demand for the ringgit as investors favour stronger US bonds. This is likely to be exacerbated by other central banks who are aggressively tightening their monetary policies to lower inflationary pressures. This increases the risks of an outflow of funds, which will jeopardise the performance of the ringgit.


Second, persistent demand and cost factors will likely keep inflation at an elevated level. Furthermore, any changes to government policy on subsidies and price controls will add fuel to fire. This is a cause for concern if the current OPR level is unable to keep up with price pressures.there is a stronger possibility that BNM will hike the OPR rate in May by 25 basis points, as part of a gradual and measured move to normalise the OPR towards the pre-pandemic rate.


Thus, there is a stronger possibility that BNM will hike the OPR rate in May by 25 basis points, as part of a gradual and measured move to normalise the OPR towards the pre-pandemic rate.


*Excerpts of this statement were published in an interview with Free Malaysia Today.

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