Kenanga Research expects Bank Negara to hold on rates this year

KUALA LUMPUR: Bank Negara will maintain its overnight policy rate (OPR) at 3.25% till year-end, said Kenanga Research.

In a research note on Friday, it said that while the central bank has room to cut interest rates to support the economy it would worsen the already volatile financial market and further weaken the ringgit.

Kenanga said the US Federal Reserve was now expected to resume its rate increase only in December.

"This is likely to trigger a wave of capital outflow out of emerging markets," it said.

It said the recovery in the economy, expected in the second half 2016, will gradually lift money supply and credit conditions. 

"On the other hand, we believe monetary conditions might experience higher volatility in the next few months in the case of short-term capital inflows seeking higher yields in the aftermath of 'Britain exit' referendum," it said.

It said with the current trajectory and the modest growth outlook, the average banking system loan growth was projected to slow to 5%-6% this year.

Meanwhile, Affin Hwang Capital has retained its loan growth forecast of 6% for 2016 as it believed that the strength in the domestic economy, with a low unemployment rate of 3.5% (March 2016), coupled with sufficient liquidity in the banking system, will continue to support credit growth this year.

In a research note, Affin Hwang Capital said it will maintain its stance on the banking sector, as the outlook for the sector will gradually improve in the second half this year, given the sound domestic economy.

May was another month of subdued loan growth, it said.

It is reported that business loan grew 4.5% year-on-year and household loan expanded 6.2%. - Bernama