KUALA LUMPUR: Bank Negara Malaysia (BNM) is likely to raise the overnight policy rate (OPR) by at least 25 basis points (bps) by year-end, in view of the aggressive interest rate hike by the United States (US) Federal Reserve (Fed), said Kenanga Investment Bank Bhd.

On Wednesday, the US Fed raised its key policy rate by 75 bps to 1.50 per cent -1.75 per cent (previously 0.75 per cent-1.00 per cent) -- the biggest hike since 1994 -- in a bid to tame high inflation which saw the country's May 2022 consumer price index surging 8.6 per cent year-on-year.

In its economic report today, Kenanga said the global financial markets' reaction to the rate hike and its eventual impact on the economy would provide a stronger impetus for most central banks to follow suit.

"However, this does not imply that BNM would follow the Fed's monetary decision in lockstep manner," it said.

The investment bank said BNM's policy stance is gradually tilting towards tightening in view of improving domestic demand following the reopening of international borders and relaxation of COVID-19 restrictions, leading to the buildup of a demand-driven inflationary trend.

"Hence, we believe that this would raise the probability that BNM would likely raise its OPR by at least 25 bps during its remaining three Monetary Policy Meetings for this year," it said.

Meanwhile, RHB Investment Bank Bhd noted that the Malaysian government bond market might see some domestic bids (with recent auctions doing reasonably well), and net foreign selling could be limited following the Fed's interest rate decision.

"This is partially due to the idea that the onshore and offshore US dollar/ ringgit market is illiquid.

"For instance, when the foreign funds sell bonds, it is difficult for them to get reasonable US dollar/ ringgit rates for proceeds repatriation, and perhaps also because March and April showed heavy foreign selling already," it said in a separate note.

Meanwhile, MIDF Amanah Investment Bank Bhd said the Fed's decision was in line with the market forecast, and expects the Fed to continue raising its policy rate by at least 50 bps at the upcoming Federal Open Market Committee meetings as inflation has yet to show a moderating trend.

-- BERNAMA