KUALA LUMPUR: Kenanga Research foresees that Bank Negara Malaysia (BNM) has reached the end of its monetary tightening cycle and will keep the Overnight Policy Rate (OPR) unchanged at 2.75 per cent for the rest of the year.

This is predicated on a further downtrend in headline and core inflation to below 3.0 per cent and an expected global economic slowdown amid tighter financial conditions, which could weigh on domestic growth over the next year.

"We believe that the central bank's dedication to maintaining both stable prices and sustainable economic growth is coherent with this view.

"However, we reckon there is still room for the central bank to adjust the policy rate, probably with another 25-basis point (bps) hike to 3.00 per cent, should an unexpected shock to global commodity prices or global financial markets, as well as changes to local subsidy policy, lead to a resurgence in domestic inflationary pressures," it said in a note today.

The research house said BNM is not expected to cut rates in 2023 or 2024.

On the current account balance, Kenanga Research said although it anticipates a slowdown in external activities due to weaker global demand amid the rising risk of a recession, its in-house view aligns with BNM's projection that the current account balance will remain above 2.5 per cent in 2023.

"In comparison, we forecast the current account balance to expand by 2.6 per cent of Gross Domestic Product in 2023, mainly due to an expected increase in tourism activity and solid demand recovery from China.

"Despite multiple potential risks to the global economy, we believe these factors will positively impact Malaysia's current account balance," it said.

Bullish view on the ringgit

On the ringgit, the research house is bullish on the local note in view of the weaker US dollar position due to the US Federal Reserve's (Fed) expected pivot to dovish from hawkish, along with Malaysia's improving political landscape and economic outlook, which may attract foreign capital inflows and support the local currency.

It said the strengthening of the yuan amid China's potential robust post-reopening recovery may also help to bolster the ringgit due to its strong positive correlation.

"Once the Fed begins to ease its monetary policy, potentially by 50 basis points in the fourth quarter 2023, it could lead to an increase of net capital flows into high-yielding emerging markets, benefitting the ringgit.

"However, we recognise that external risks such as the escalating tensions between the US and China and the Russia-Ukraine war, could have adverse effects on the ringgit and influence its direction. Nonetheless, at this juncture, we still maintain our end-2023 US dollar/ringgit forecast at 4.11," it added.

More tax exemptions for retirement contributions

Kenanga Research agreed with BNM's view that reforms are needed to ensure that Malaysians are adequately protected during their retirement.

It reckoned greater tax exemptions could be given to retirement contributions to encourage higher voluntary contributions.

"Besides ring-fencing retirement funds and improving old-age social safety nets, the retirement age, currently 60, could be raised given the potential for Malaysia's average life expectancy to continue improving going forward.

"This would align with BNM's recommendation that job opportunities for older workers be created and increased via policy measures, to ensure adequate employment for individuals of all ages," it said.

Kenanga Research said that while raising individual and employer contribution rates may eventually be necessary, it is crucial to be mindful of disposable income levels and to implement this alongside sufficient wage growth and stable unemployment rates.

 - BERNAMA