Prices of gasoline, food and other necessities rose sharply in May, with the U.S. inflation index hitting a 40-year high in May, or 8.6 percent higher compared to the same month last year. This is higher than the 8.3% in April.
U.S. inflation continues to rise, which also means that the U.S. policy implemented is not enough to curb domestic inflation, the Fed will take more aggressive measures to curb inflation. It is generally expected that the Fed will announce a 0.50% to 0.75% rate hike in June, and individual rate hikes of 0.50% in July and September.
The Fed’s rate hike will undoubtedly lead to an accelerated flow of dollars back to the U.S., and there will be a shortage of dollars and a dollar vacuum in various markets around the world. Countries around the world will also choose to raise interest rates to slow down the withdrawal of funds, and it is almost a foregone conclusion that Bank Negara will continue to raise interest rates in the second half of the year.
The Malaysian dollar has already depreciated by 5% from January to June 2022, from RM4.18 per US dollar in January to RM4.40 per US dollar in early June, and from RM3.08 per Singapore dollar in early January to RM3.17 per Singapore dollar today, a depreciation of 2.9%.
The general expectation is that Bank Negara will raise interest rates by at least 0.50% in July, September and November, and the overnight policy rate (OPR) in Malaysia is expected to be around 2.50% by the end of 2022. If the Fed increases the rate, Bank Negara Malaysia will be forced to follow suit and the OPR will reach 2.75% at the end of the year.
If Bank Negara raises the overnight policy rate (OPR), borrowers will also have to bear a higher monthly loan, which will add to the burden of borrowers. However, the increase in interest rates by the NB is good news for time deposit depositors as they will also receive higher interest rates each month.
