KUALA LUMPUR: Bank Negara Malaysia (BNM) has increased the Overnight Policy Rate (OPR) by 25 basis points to 2.00 per cent its third Monetary Policy Committee (MPC) meeting this year.

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.25 per cent and 1.75 per cent, respectively, BNM said in its Monetary Policy Statement today.

The central bank said the sustained reopening of the global economy and the improvement in labour market conditions has continued to support the recovery of economic activity.

"These have partly cushioned the impact of the military conflict in Ukraine and the strict containment measures in China.

"Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the United States (US)," it said.

Consequently, BNM said several central banks are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures.

The global growth outlook will continue to be affected by the developments surrounding the conflict in Ukraine, COVID-19, global supply chain conditions, commodity price shocks, and financial market volatility.

Meanwhile, for the Malaysian economy, the central bank said the latest indicators showed that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth.

The labour market is further lifted by a lower unemployment rate, higher labour participation and better income prospects, it said.

"The transition to endemicity on April 1, 2022 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders.

"Investment activity and prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook."

However, BNM said risks to growth remain, which included a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding COVID-19.

Headline inflation is projected to average at between - 3.2 per cent and 2.2 per cent in 2022.

"Given the improvement in economic activity amid lingering cost pressures, underlying inflation, as measured by core inflation, is expected to trend higher to average at between - 3.0 per cent and 2.0 per cent in 2022.

"Nevertheless, upward pressure on prices would be partly contained by existing price controls and the continued spare capacity in the economy," it said.

Meanwhile, the inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures on administered prices.

Over the course of the COVID-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75 per cent to provide support to the economy.

BNM said the unprecedented conditions that necessitated such actions have since abated.

"With the domestic growth on a firmer footing, the MPC decided to begin reducing the degree of monetary accommodation.

"This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability," it added.

-- BERNAMA