Possible hike in OPR later this year on March’s steady inflation rate

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KUCHING: Malaysia’s inflation rate held steady at 3.5 per cent in March, marking the fourth consecutive month it breached the government’s comfort level of three per cent.

This led analysts to expect Bank Negara Malaysia (BNM) to increase the Overnight Policy Rate (OPR) by 25 pasis points towards the latter part of 2014.

The research team behind RHB Research Institute Sdn Bhd (RHB Research) said given the nature of the factors behind the increase in inflation, BNM reiterated that monetary policy is not the best policy tool to manage the situation.

“Although the Central Bank appears unperturbed by rising inflation, we believe it is still important for them to take a pre-emptive move to control rising inflationary expectations and given that inflation will be accelerating again and for two consecutive years in 2014 and 2015, after a pick-up in 2013.

“As a whole, we expect the Central Bank to increase its OPR by 25 basis points toward late 3Q14 to 3.25 per cent, after keeping it unchanged at three per cent for more than two years,” it said.

To note, BNM has kept its OPR unchanged for the 17th straight meeting at three per cent since May 2011.

Economist Alan Tan from the research division of Affin Investment Bank Bhd (Affin Research) said BNM will likely normalise the OPR in the second half of the year following its belief that BNM will still focus on providing a supportive monetary environment for the domestic economy, supporting fiscal consolidation policy, by maintaining accommodative interest rates as well as accessibility to financing for the private sector.

“However, apart from concerns on the potential increase in inflationary expectations, following government’s decision to raise fuel prices and electricity tariffs, we believe BNM is also monitoring for signs of destabilising risks of financial imbalances, especially on the level of household debt in the country,” Tan said.

“As the country’s monetary policy statement is forward-looking, the shift in the latest language of the MPC statement, where BNM noted that “the MPC will also continue to monitor for signs of destabilising risks of financial imbalances,” could suggest some normalisation of OPR in the second half.

“We believe BNM could raise its OPR by 25 basis points to 3.25 in 2H14, if external economic conditions improve further.”

AmResearch Sdn Bhd (AmResearch) economist Patricia Oh concurred with this view, noting that BNM going forward will continue to focus on ensuring sustainable economic growth in a stable price environment while avoiding the build-up of financial imbalances.

“Despite the negative real interest rate environment, we do not foresee a raise in interest rate in 1H14 unless the costpush inflation leads to a more persistent inflationary risk ahead,” Oh stated.

“That said, we believe that interest rate will be maintained in the upcoming policy meeting in May while BNM assesses the economic impact arising from the cuts in subsidy.”