BNM will not rush to push up rates, says MARC

Responding to the article, it said the reporting by Bloomberg reflected a lack of understanding of the Malaysian economy, external position, financial system and its economic policies.

KUALA LUMPUR: Despite speculation that a rate hike is on the cards, Malaysian Rating COrporation Bhd (MARC) believes Bank Negara Malaysia (BNM) will not rush to push up the Overnight Policy Rate (OPR)

In its economic research report on Friday, MARC says BNM is unlikely to raise OPR rates soon owing to several economic indicators.

"Inflation in 1H2017 has been largely driven by cost factor. In particular, the rise in petrol prices (RON95) explains the major increase in inflation in 1H2017.

"Demand-driven factors remain benign, judging by the trend of core Consumer Price Index which remained stable at an average of 2.5% in the year-to-date. 

"This suggests the lack of a widespread upward price pressure in the economy," it said, adding that it expects headline inflation to moderate and average about 3.5% in 2017.

MARC also believes that BNM's recent description of the state of inflation in its statement conveys less urgency than previously seen.

"Prior to July 2017, inflation was described as 'depending on global oil prices which are highly uncertain'. In recent statements, however, the tone has softened. The trend is “expected to moderate, on expectations of a smaller effect of global cost factors,' according to BNM."

In terms of productivity, Malaysia's output gap has remained negative, whereby actual output is still below its potential output despite the recent surge in real GDP growth rates.

"Also, private consumption – one of the key determinants in a rate hike decision – has not surpassed its trend growth in 1H2017 despite having recovered from its low in 3Q2015. In addition, Goods and Services Tax (GST) collection, while having improved in 2Q2017 (RM10.1bil versus 1Q2017’s RM9.2bil), is anticipated to moderate to RM40bil in 2017, down from RM41.2bil in 2016.

"Consumers are still being adversely affected by the weaker ringgit (average of RM4.370 per USD in 1H2017), down by 7.2% from an average of RM4.056 per USD in 1H2016."

Capital flows have improved to a net foreign inflow situation, according to MARC. "In the three months ended June 2017, the Malaysian bond market recorded an average foreign inflow of RM5.5 billion, compared with an average outflow of RM12.5 billion in 1Q2017," it said.

Malaysia is also expected to keep in line with interest rates in the region, which have been on the downtrend with Asean central banks keeping accommodative monetary policies.

"With other countries maintaining an accommodative monetary stance, a rate hike in the OPR would likely induce capital inflows into Malaysian shores and complicate the management of liquidity and inflation in the economy," MARC said.

Furthermore, Malaysia's high household debt raises the issue of consumers' ability to service their debts should there be a rate hike, it added.

"All in all, MARC feels that the third quarter economic performance will be key to BNM’s future rate hike decision. If the economy’s performance continues to beat expectations in the rest of the year, the chances of a rate hike will be higher. However, we believe BNM will also take into account rising geopolitical risks before making its decision."