KUCHING: Researchers believe Bank Negara Malaysia (BNM) is poised to increase the overnight policy rate (OPR) by 25 basis points in the first half of this year to counter rising inflation.
Following the release of BNM Annual Report 2016 on Thursday, the research arm of TA Securities Holdings Bhd (TA Research) believed the central bank’s new inflation projection range of 3.0 per cent to 4.0 per cent implied that real policy rate will be negative, which could prompt a tightening bias in the monetary policy.
“We expect the increase in rate to augur well for the banking sector as (profit) margins are compressed by competitive pressures.
“We are raising our OPR forecast for this year – expecting a 25 basis point rate hike in the first half of 2017 to 3.25 per cent,” TA Research said in a report.
It previously predicted the OPR to be maintained at 3.00 per cent throughout the year, adding that the higher rate projection was likely due to economic growth which is expected to improve as a result of better performance of the external sector, challenged by higher inflation as well as volatile capital flows amid an on-going US Fed tightening cycle.
Despite the more optimistic outlook, TA Research said BNM remains wary of the challenges ahead for some businesses and households.
The research firm said the central bank foresees possible deterioration in loan performance.
Nevertheless, the research firm gathered that the uninspiring loan performance is not expected to be broad-based given the stable labour market conditions and continued economic growth.
Additionally, the research firm said the central bank will intensify its surveillance and supervision on the oversupply of office and retail spaces, heightened financial market volatility, external exposures of financial institutions and corporate borrowers as well as cyber threats and conduct issues.
On another note, the research firm believed the central bank’s outlook for Malaysia’s economy appeared to be more positive.
It noted the central bank believed private consumption and private investments are expected to fuel the increase while stronger exports will give an added boost to the economy while BNM expecs gross domestic product (GDP) growth of between 4.3 per cent and 4.8 per cent for 2017.
BNM believed Malaysia’s household capacity to spend remains healthy as the country’s household liquid financial assets to total household debt ratio remained stable at 140.4 per cent in 2016.
Moreover, analysts at the research arm of Hong Leong Investment Bank Bhd (HLIB Research) and AllianceDBS Research Sdn Bhd (AllianceDBS Research) believed the banking sector remained resilient to support the country’s economic growth.
HLIB Research in a report said the banking sector remained strong with ample liquidity to absorb loss benefiting from various regulations on capital management.
Moreover, the research firm said pre-emtive measures by banks that have exposure to the oil and gas (O&G) sector was well contained as the interest coverage ratio of the sector remained low at 7.7 per cent of total corporate debt.
Furthermore, AllianceDBS Research in another report said the banking sector is expected to remain sound while banks’ capital buffer is sufficient to cover potential loss under various stress tests.
The research firm noted the debt-servicing ability of households is sustained by steady income and employment conditions coupled with prudent affordability assessments.
Aside from that, Malaysian corporates’ financial health remained healthy which supports their asset quality.