Slight chance of BNM raising OPR this year

KUCHING: There is a slight chance that Bank Negara Malaysia (BNM) could raise the overnight policy rate (OPR) this year given the current macro conditions affecting the global market, analysts observed.

In a report, the research arm of AmInvestment Bank Bhd (AmInvestment) believed that BNM could continue to maintain the current 3.25 per cent policy rate in 2018.

Nevertheless, it placed a 20 per cent chance of another hike in September this year.

“Much will depend on whether the US Fed overshoots the rate hike from three times to four times, each hike by 25bps or an extreme 50bps hike in one of the Fed’s meeting.

“Such a move will influence the interest rate differentials between BNM and the Fed Fund rates, and the gaining momentum in the velocity of money in the local scene where if the speed gains momentum much faster, we can conclude a potential inflationary pressure coming from the demand side of the equation,” the research house opined.

Of note, following its second monetary policy committee (MPC) meeting for the year, BNM announced that it has maintained the OPR at 3.25 per cent.

In a statement, it said, “At the current level of the OPR, the degree of monetary accomoditiveness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation.”

Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) also viewed that there is a possibility that BNM could raise the OPR again this year.

It noted that there is still room for another 25bps rate hike. However, it also pointed out that this possibility is increasingly limited and largely dependent on external factors (US Fed rate normalisation, the impact of US President Donald Trump’s policy: on trade, infra spending, tax reforms, and others.

“Furthermore, as the economy moves further into 2018, the likelihood for BNM to raise interest rates theoretically diminishes as economic growth moderates or moves towards below trend.

“In addition, we do not think that any unpopular policy that would affect consumer welfare would be announced before the 14th General Election (GE14), which is expected to be held in late April or early May.

“Therefore, a rate hike after the GE14, is a better bet provided the macro environment is conducive,” it opined.

Aside from that, it expected the growth acceleration in the second half of 2017 (2H17) to provide enough momentum to generate positive spill over into 2018 primarily in the 1H18 which is expected to outpace the 2H18’s growth.

“BNM seems to remain sanguine about the economic growth prospects in spite of the fact that it might slow this year,” Kenanga Research noted.

It also pointed out that BNM continues to believe that “growth prospects will be sustained by the positive global growth outlook and spill overs from the external sector to the domestic economy”.

“The growth momentum would remain sustainable going into 2018 or at least till 1H18. Following better-than-expected 4Q17 growth of 5.9 per cent, we have revised up our 2018 GDP forecast to 5.5 per cent, the upper end of the official forecast of five to 5.5 per cent.

The MPC expects domestic demand to remain the key driver of growth, ‘with additional impetus from the external sector’,” it added.

All in, Kenanga Research pointed out that there was virtually no change in BNM’s outlook and argument for a slowing inflation this year.

“BNM expects the stronger ringgit to mitigate higher energy and commodity prices in 2018. Improving labour productivity and investments for capacity expansion is also expected to dampen underlying inflation. In a nutshell, the MPC projects inflation to moderate in 2018, reiterating the view that headline inflation trend to remain dependent on global crude oil price.

“We forecast CPI growth to moderate to 2.8 per cent from 3.7 per cent in 2017,” it added.

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