Octa forecast: OPR hike will likely be on hold due to falling inflation

Learn about the potential impact on the Malaysian ringgit.

Key Takeaways

• Headline inflation in Malaysia declined to 1.9% in September.
  
• The Overnight Policy Rate (OPR) is unlikely to be raised at the next meeting, given the recent decline in headline inflation to below 2%.
  
• The pause in the OPR change will continue to hurt the ringgit, and the probability of USDMYR rising above 5.0000 remains high.
  

The Monetary Policy Committee (MPC) of the Bank Negara Malaysia (BNM) will meet on 1 – 2 November to decide on monetary policy. An overnight policy rate (OPR) increase may no longer be relevant, given the recent decline in headline inflation.

Notably, Malaysia's current OPR currently stands at 3%, while Malaysia's headline inflation, as measured by the consumer price index (CPI), eased to a 1.9% increase in September 2023, the lowest over the last two and a half years. The inflation rate for September 2023 was slightly below the consensus forecast of economists polled by Reuters and Bloomberg, at 2.2% and 2.1%, respectively. The forecast number considers significant external and internal risks to domestic inflation that should be monitored closely in the near term, namely rising energy prices and the ringgit falling.

'In a low inflation environment, the decision to change the OPR is no longer relevant', said Kar Yong Ang, the Octa financial market analyst. 'This situation will continue to hurt the ringgit, which may eventually provoke a return to the monetary tightening strategy', he added.

The ringgit depreciation is also affected by such factors as expectations that the U.S. federal funds rate remains high without clear signals of its decline. In addition, Chinese economic indicators were weaker than expected, and the easing of the People's Bank of China's monetary policy negatively impacted investor sentiment in the region. The probability of USDMYR growth above 5.0000 remains high.
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