BNM could raise OPR in 2H next year

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KUCHING: The central bank could raise the overnight policy rate (OPR) by 50 basis points in two meetings from the second half of 2014.

RHB Research Sdn Bhd (RHB Research) in a report yesterday said the move could be a pre-emptive measure to control rising inflationary expectations.

It added that the expectations of the US Federal Reserve raising its interest rates in 2015 and concerns over rising inflationary pressure in Malaysia could lead to some short term capital outflow from the country in the second half of 2014.

The research firm’s economist Peck Boon Soon noted that as the increase in inflation rate from September 2013 was policy-induced, Bank Negara will unlikely use demand management policy and raise interest rate to address it.

Peck observed that Malaysia is still facing downside risk on economic growth coming from fragile global economic recovery.

On a wider picture, Peck also observed that the US Federal Reserve will not raise its key policy rate in the near future which could put pressure and intensify outflow of short-term foreign capital from the country.

Meanwhile, RHB Research said the implementation of the goods and services tax (GST) on April 1, 2015 with a fixed rate of 6 per cent will likely result in an one-off impact on inflation.

As such, the research firm expect the inflation rate to jump to 3.8 per cent to 4.2 per cent in 2015, the highest since 2008.

As for next year, the research firm expect the inflation rate to go up and range from 2.8 per cent to 3.2 per cent in 2014.

The pace of the rise of the inflation rate will depend on the extent of subsidy rationalisation for instance whether the government will adhere to its plan of cutting fuel subsidies once every six months compared with an estimated inflation rate of 2.2 per cent for this year.

On the other hand, MIDF Amanah Investment Bank Bhd (MIDF Research) concurred with the view of RHB Research that Bank Negara will raise its interest rate by 50 basis points next year.

However, MIDF Research projected that the timing could be as early as the end of the second quarter of 2014 or early third quarter of 2014 if the government raises fuel prices in the first three months of the year.

The research firm noted that the emphasis by the government to restore market confidence over its fiscal position is the top priority and it expects the possibility of another fuel price hike in the first quarter of 2014.

On a separate note AmResearch Sdn Bhd (AmResearch) said furhter subsidy cuts and higher petrol prices in the second half of 2014 will push the inflation rate above 3 per cent.

The research firm’s economist Patricia Oh said, “As such we envisage interest rate to increase by 25 basis points in the second half of 2014 should inflation stay elevated above 3 per cent for an extended period.

“A prolonged period of negative real interest poses threats to the broader economy,” she said.

In the meantime, AmResearch noted that the prevailing positive real interest rate in Malaysia continues to be attractive for international carry trades and inflows of foreign funds.

The research firm observed that in September, foreigners increased their holdings of Malaysia Government Securities (MGS) by 2.1 per cent month-on-month to RM128.12 billion.

The foreign holdings of MGS accounts for 42.75 per cent of total outstanding of the government fixed income securities.

As for equity market, AmResearch observed that foreigners were net sellers of Malaysian shares during the month of October It said foreigners were net selling of equities amounted to RM740 million compared with net buying of RM720 million in September.

To recap, the central left its OPR unchanged at three per cent during its last monetary policy meeting for this year on November 7 due to the need to strike a balance between maintaining an accomodative monetary policy to continue supporting growth admist the downside risks coming from rising external headwinds and containing price pressure.

The central bank in an earlier statement said the decision to hold the OPR stable was also aided by a low inflation, which remained manageable at 1.8 per cent year-on-year from January to September period, despite trending up gradually.

The central bank added that Malaysia’s growth will be sustained, supported by continued expansion in domestic activity and on the back of improvements in exports due to improving external sector.