Kenanga expects Bank Negara to continue monetary tightening bias

In a research note today, it said improved domestic labour market and economic recovery may compel BNM to raise the overnight policy rate (OPR) by another 25 basis points (bps) during its Monetary Policy Committee meeting today in an effort to preempt the build-up of demand-side inflationary pressure.

"Moving forward, we expect BNM may continue to raise the OPR in 25 bps increments at every meeting until January 2023, bringing it to 3.00 per cent," it added.

Meanwhile, Kenanga forecast the ringgit to be traded at 4.35 against the dollar by year-end, compared to 4.17 at the end-2021.

"The ringgit still has the potential to reverse its losses and strengthen to around the 4.35-level by end-2022 amid favourable domestic economic prospects, potential US dollar seasonal weakness and elevated commodity prices," it said.

it added that the local unit is also expected to benefit from a potential rebound in the Chinese yuan post-Chinese Communist Party's Congress in October.

"However, our forecast is subject to significant downside risks, including domestic political uncertainty, a possible invasion of Taiwan by China and bets of another super-sized United States Federal Reserves rate hike post-Federal Open Market Committee meeting this month," Kenanga said.

Yesterday, BNM announced that the international reserves fell by US$1.0 billion or 0.9 per cent month-on-month to US$108.2 billion as of Aug 30, 2022 -- its lowest level since December 2020, mainly due to the sharp drop in foreign currency reserves.

The central bank said the amount is sufficient to finance 5.4 months of imports of goods and services (previously retained imports) and is 1.1 times total short-term external debt.