The unity government under Prime Minister Anwar Ibrahim should be commended for steering Malaysia’s economy to a stronger than expected 2023 first quarter gross domestic product (GDP) growth of 5.6%. The good GDP growth was driven by further expansion of household spending, employment and private consumption spending.
The strong first quarter can also be attributed to economic policy alignment between the government and Bank Negara Malaysia(BNM) in focusing on sustainable GDP growth. The alignment and coordination between the Federal government’s looser fiscal policy, with the largest 2023 Budget in history of RM388 billion, and BNM’s benign monetary policy, with twin pauses in hiking up the Overnight Policy Rate(OPR) in January and March 2023, has indeed facilitated economic growth.
In other words, policy alignment by BNM needed with the federal government to sustain robust economic growth. However, the surprise hike in OPR by Bank Negara on 3 May, surprising more than 80% of economists polled, may make it difficult for Malaysia to repeat the 5.6% first quarter GDP growth in the second quarter of 2023.
The reasoning provided by BNM Governor Nor Shamsiah binti Mohd Yunus of wanting to guard against a resurgent inflation as the justification for the surprising hike in the OPR recently has created some confusion. Why is inflation a problem now necessitating an OPR hike but not a problem then in January and March 2023 when BNM paused hikes in OPR?
Why Did BNM Paused Twice In Hiking Up The OPR When Headline and Core Inflation Was Higher?
Nor Shamsiah had expressed concern that core inflation remained at elevated levels, necessitating an OPR hike. This has caused some confusion because core inflation had in fact moderated to 3.9% in the first quarter of 2023(announced in April this year) as compared to the final quarter in 2022 of 4.2%(announced in January this year).
If core inflation is such a big concern, why were there two interest rate pauses of no hikes in OPR by BNM in January and March 2023, even though core inflation was higher at 4.2% during the final quarter of 2022 as compared to 3.9% in the first quarter of 2023. A BNM seriously concerned about headline and core inflation should have immediately hiked up the OPR in January and March 2023 when inflation for the final quarter of 2022 was higher and not wait until now.
Despite BNM not hiking up the OPR in January and March this year, both headline inflation and core inflation successfully decreased to 3.4% and 3.8% respectively in March 2023. Both headline and core inflation were already being reined in despite no hikes in OPR by BNM.
This questions the rationale for BNM’s surprise hike in OPR on 3 May in the absence of any evidence of a resurgent inflation but has instead caused unnecessary financial hardship to borrowers, particularly individuals and SMEs.