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Principal Malaysia: Solid financial fundamentals will contain NPLs despite rate increase 

KUALA LUMPUR: The normalisation of interest rates will not trigger an increase in non-performing loans (NPLs) backed by strong and solid financial fundamentals and savings during the pandemic period where interest-free moratorium was given.

Principal Malaysia's chief executive officer and country manager Munirah Khairuddin said although many believed that no good comes from the interest rate increase, it is important to beat down inflation at this point by recalibrating the excess.

"During the pandemic, financial institutions have priced in potential NPLs and the interest rate increase has been priced in.

"Hence, despite the tailwinds, we believe that we are going to see a fairly resilient economy," she told reporters at the 2022 Principal Asia Pacific (APAC) Summit here today.

She said this following rising concerns that Bank Negara Malaysia (BNM) is expected to increase its overnight policy rate (OPR) by 25 basis points for the fourth time this year on Nov 3.

During the pandemic period, the interest rate has been lowered to 1.75 per cent, the lowest in history, and as the nation entered the transition to endemic phase, it has gradually increased over the past three sittings to 2.50 percent.

Meanwhile, Principal's chief Investment officer Fixed Income, Principal Southeast Asia, Jesse Liew said after a series of interest rate increases by the United States Federal Reserve (US Fed) this year, a pause is expected to kick in the first quarter (Q1) next year to measure the effectiveness of interest rate hikes in beating down inflation.

"Any interest rate hike would take time to see if it fit into the real economy such as loans. So for any central bank, I think it is prudent to observe what those rate hikes have to the real economy.

"I would say that not just Malaysia needs to do that, other countries as well especially those who implemented a sharp hike," he said.

Liew said that it is also key for economies to implement such measures as a continued hike without observing the impact could hurt the demand in the local economy, leading to the weakening of other economic indicators.

Asked whether BNM would follow suit if US Fed pauses its hike, he said that in terms of monetary policy, it is important that BNM is independent to make their own decision, largely because the macro economy condition over in Malaysia is quite different from the US.

"So the possible rate pauses, they (BNM) may or may not be having any correlation in that sense but I would say that BNM generally would try to evaluate the Malaysian context before making a decision, especially on the strength of the ringgit and its competitiveness," he added.

The strengthening of the US dollar has led major currencies including the Japanese yen, British pound and Swiss franc to slip against the US dollar.

The ringgit has also been impacted by the strengthening of the greenback.

The Principal APAC Summit is an annual event to provide insights to business leaders in Singapore, Malaysia and Thailand on the global economy and investment risks and opportunities.

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