Potential hike in OPR next year — Economists

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KUCHING: With Bank Negara Malaysia (BNM) maintaining the Overnight Policy Rate (OPR) at 3.25 per cent on Thursday, economists believe a 25 basis point (bps) hike is possible in 2015 in order to counter the risk of destabilising financial imbalances.

Economists with Affin Hwang Investment Bank Bhd (Affin Hwang Research) believe the OPR will potentially be raised by 25bps in 2015, in order to normalise interest rates and counter the risks of destabilising financial imbalances.

“These financial imbalances may emanate from a prolonged headline inflation above the long-run above-average rate of three per cent due to removal of subsidies and upcoming implementation of the Goods and Services Tax,” it said in its note on the matter.

Affin Hwang Research added high domestic asset prices, rising household indebtedness and a weakening ringgit as further causes of Malaysia’s destabilising imbalances.

Another research powerhouse Maybank Investment Bank Bhd (Maybank IB Research) pinpointed the second half of 2015 as a likelier period for an OPR hike, following BNM’s assessment that the current level is accommodative and appropriate.

It described the tone and content of the accompanying Monetary Policy Statement (MPS) as generally “dovish”.

“The OPR is on ‘pause’ as the MPS maintains reference to ‘financial imbalances’, but the policy focus is ‘growth-inflation balance’. We expect the OPR pause until the late-third quarter or early-fourth quarter of 2015 at least, to enable BNM to assess and mitigate the impact of the on-going fiscal consolidation,” it said.

“This is alongside reforms like the inflationary effect of subsidy rationalisation and introduction of the GST on consumer spending, hence growth. Currently, we are pricing in a 25-basis points hike of the OPR at the final MPC meeting of 2015 in November.”

For prudent reasons, RHB Research Institute Sdn Bhd (RHB Research) said the central bank could revisit the need to raise the rate again in the first quarter of 2015, should the economic growth momentum remain
robust.

This is because the headline inflation would likely spike up upon GST’s implementation and real interest rates will turn more negative, risking the build-up of financial imbalances over time, it said.

At the same time, market expectations of the first rate hike in the US will start to increase, risking the outflow of short-term capital and a weakening ringgit.

“Raising the policy rate will provide some support to the currency and enable the Central Bank to manage a more orderly outflow of short-term capital at a time when domestic consumer spending will likely spike up ahead of the implementation of the GST.”

Another research firm, Hong Leong Investment Bank predicted the OPR would be kept unchanged throughout 2015, believing BNM would weigh the downside risks of external developments to domestic growth against the threat of demand-driven inflation, which is largely absent judging from recent CPI data.

Recent subdued monetary and financial data also pointed to diminishing risk of financial imbalances, it added.