The stronger-than-expected economic growth in the first quarter of this year has fuelled expectations of economists that interest rates in Malaysia could go up as early as July when Bank Negara’s Monetary Policy Committee (MPC) convenes its next meeting.
Several economists, when contacted, expected the central bank to raise the overnight policy rate (OPR) by 25 basis points from the current 3.0% to 3.25% by the next MPC meeting scheduled to be held on July 10.
Their belief is based on the strong growth in the first quarter of 2014 amid signs of continued build-up of financial imbalances and higher inflationary pressure in the country.
“We think it is a good time for the central bank to increase the OPR now as the country’s economy has been quite resilient as evidenced by the recently released GDP (gross domestic product) data,” Alliance Investment Bank chief economist Manokaran Mottain said.
“We see the potential OPR hike in July to be a normalisation process, rather than a monetary tightening measure, as at 3.25%, we think the rate remains accommodative to growth,” Manokaran told StarBiz.
He noted that with the country’s economy going strong, the expected adjustment in interest rates would not have a significant impact on potential growth.
Malaysia’s economy grew 6.2% in the first quarter, driven by strong domestic demand and recovery in net exports. The headline inflation, as measured by the annual change in consumer price index (CPI), remained on an upward trend and averaged at 3.4% during the quarter due to higher costs in the housing and utility and transport sectors.
Bank Negara had noted that Malaysia’s inflation would remain above its long-run average of 3% even as the country’s growth prospects remain firm.
The central bank sent out the clearest signal of an imminent hike in the OPR, a move that would cause interest rates to increase, in its last MPC meeting early this month. It alluded to the need of adjusting the degree of monetary accommodation as financial imbalances continued to build up amid firm growth prospects and higher but stabilising inflation.
Bank Negara had left the OPR unchanged for the past two years. The last revision happened in May 2011, when the MPC decided to increase the OPR by 25 basis points (bp) to 3%.
The prolonged low levels of interest rates in Malaysia had contributed to the rising household debt level, which reached a record 86.8% of GDP at end-2013.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said there was a high possibility of Bank Negara raising the OPR level in the upcoming MPC meeting in July, given the rising risk of financial imbalances due to the elevated levels of household indebtedness.
“Bank Negara’s monetary stance needs to be aligned with such dynamics, which if left unattended, would lead to instability in the financial system,” Afzanizam explained.
Nevertheless, he said, Bank Negara’s monetary policy adjustment would likely be gradual, and the central bank would not take too aggressive a stance on the OPR.
“The recent GDP growth numbers implied that the current growth trajectory could withstand such adjustments as domestic spending is anticipated to remain resilient amid improvement in the external sector,” Afzanizam said.
Citigroup Inc economist Kit Wei Zheng, on the other hand, believed Bank Negara would adopt a more hawkish stance. He said: “We expect a 25 bp rate hike in July, with another 25 bp hike in September. But do not rule out further hikes thereafter.”
Zheng rationalised: “With inflation possibly climbing to 4.5% in 2015 on GST (goods and services tax) implementation and fuel price hikes amid strong growth, the extent to which further hikes may be required to arrest the slide in real interest rates remains to be seen.”
Meanwhile, CIMB Investment Bank Bhd economist Julia Goh reiterated her group’s view that the 25 bp hike in OPR would only take place in September, contrary to the consensus view of a hike in July.
“The need to raise the OPR coincides with the country’s firm growth and rising inflation amid growing imbalances, but we think the normalisation process will only begin in September, and not in July due to the Ramadan festival,” Goh said.
According to economists, expectations of an interest rate hike would likely attract foreign funds into Malaysia. This reinforced their views that the ringgit would strengthen further against the US dollar towards the second half.
Nomura Securities, for one, pointed out that the local fundamental drivers of ringgit remained positive, especially on the back of the country’s strong first-quarter GDP and current account numbers. However, Nomura said, until Bank Negara tightened its monetary policy, there would still be the risk of a significant pickup in the US economy and higher US bond yields limiting the ringgit performance. - By Cecilia Kok and Isabelle Lai (The Star)
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