OUTLOOK AND STRATEGY FOR 2023 We expect continued volatility in global financial markets in 2023 as the Federal Reserve (Fed) remains committed and aggressive in its rate normalisation path to tame inflationary pressures. The business operating environment will likely remain challenging amidst rising oil prices, lingering supply chain disruptions and geopolitical risks arising from the Ukraine-Russia conflict. The Fed funds rate is expected to reach around 5% in Q1 2023. The Federal Reserve seems determined to reduce inflation to its 2% target. Rates are expected to remain 'higher for longer' even if the US economy slows down or slips into a technical recession, despite market expectations of a likelihood of rate cuts by the end of 2023. The US Treasury yield curve is likely to remain deeply inverted. On the local front, BNM is expected to remain cautious in its rate normalisation path, given growing external risk factors. Most forecasts anticipate one or two more hikes in the OPR in 2023. The domestic yield curve, which has largely moved in tandem with the US curve in recent years, will continue to do so in 2023, albeit with increasingly smaller correlations as domestic economic factors may require more accommodative monetary policy relative to major economies. Real money investors may pivot towards longer duration exposures with the prospect of the global recession in late 2023. A longer-term concern, however, will be the increasing interest rate differentials with major economies that may require BNM to resume OPR hikes by the end of 2023. We believe that it will take some time for global FX and Rates markets to stabilise. Continued improvements in the overall liquidity metrics of the Bank and the generation of non-volatile trading income from sales and distribution will be T&M’s priorities in 2023. This will entail strategies of short-duration investments, further diversification of the Bank’s wholesale funding base and emphasis on customer service excellence. Despite the tougher outlook for global economic growth and challenges facing the US economy, the US Dollar is likely to remain at historic highs during the first half of the year. However, the greenback may weaken over the course of the second half of 2023 as the Fed slows down its tightening cycle. Separately, we expect weakness in the Ringgit against the US Dollar to persist as the Fed continues to hike while BNM maintains its gradual policy stance. We expect this trend to reverse towards the end of the Fed’s hiking cycle. We expect USD/MYR to be around 4.000 by end-2023. Management Discussion & Analysis Bank Islam Malaysia Berhad 97 01 05 03 07 02 06 09 04 08
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