business

Economists foresee Bank Negara raising lending rates soon

KUALA LUMPUR: Research houses expect Bank Negara Malaysia to hike the Overnight Policy Rate (OPR) as early as January following the central bank’s signal in its monetary policy statement.

The central bank’s decision to stand pat on Thursday was in keeping with market expectations but they were caught by surprise by the `hawkish tilt’ in the forward guidance in the statement.

The first monetary policy statement will be issued on January 19.

DBS Bank said while the inclusion of the forward guidance may suggest a policy move as early as January, much will also depend on the inflation readings in the coming two months.

“Consideration must also be given to the upcoming election. BNM also has more than just the OPR in its policy tool bag,” it said.

“It could well raise the Statutory Reserve Requirement Ratio (SRR) before executing a rate hike per se,” DBS Bank added.

BNM first reduced the SRR by 50bps to 3.50 per cent in February before officially cutting the OPR by 25 basis points in July.

The research house expects the SRR to be raised by 50 basis points before two rate hikes of 25 basis points each in the third quarter and fourth quarter of 2018, which will bring the OPR to 3.50 per cent by the end of 2018.

AffinHwang Capital Research said the rationale for the rate increase, if it materialises, would be to prevent the economy from exceeding its potential output level, which would translate into higher inflationary pressure.

“We are maintaining our view that BNM will likely increase its OPR by 25 basis points to 3.25 per cent in the second half of 2018, on expectations that the current strong economic momentum continues on a favourable global economic environment.”

But it argued that any increase would be at a measured pace, and the magnitude of increase would be gradual and dependent on macro growth and CPI data, following closely also the development in US monetary policy, direction of the Fed Funds rate and reduction in the Fed’s balance sheet.

BMI Research, which remarked that the central bank had opened the door to monetary tightening, is expecting a quarter basis point hike next year on the back of an improving economic outlook and to pre-empt rising inflation.

“The risks to our interest rate view are firmly to the upside,” said BMI Research.

The central bank could hike rates if growth comes in stronger than expected and inflation remains persistently high due to higher food prices and a rapid acceleration in credit growth.

“A more aggressive rate hiking cycle by the US Fed could see BNM hike rates to prevent the currency from selling off excessively as a result of capital outflows.

AmBank said BNM’s hawkish tone follows that of the Bank of Korea and the central bank of Philippines which also debated the degree of accommodation needed.

It also supports the view for a 25 to 50 basis points hike next year, it said.

Most Popular
Related Article
Says Stories