PETALING JAYA: Bank Negara has sent out the clearest signal of an imminent hike in the benchmark overnight policy rate (OPR), a move that would cause interest rates to increase.
In a statement to announce its decision to maintain the OPR at 3%, it also alluded to the need of adjusting the degree of monetary accommodation as financial imbalances continued to build up.
Bank Negara said the build-up in financial imbalances came amid firm growth prospects and higher but stabilising inflation. The OPR has been maintained at 3% since May 2011.
A hike in the OPR will impact the rates on deposits and loans (including base lending rates) that commercial banks offer as these banks refer to the OPR as the benchmark.
“Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy,” it said in the statement yesterday.
Alliance Investment Bank chief economist Manokaran Mottain told StarBiz that the last paragraph in the monetary policy statement was a hint of what could be ahead.
“After reading the statement carefully, we noticed that the central bank’s tone towards the OPR has changed. We believe the adjustment may happen as early as July,” he said.
He expected the interest rate to increase by 25 basis points.
“Following the issuance of the statement, we are more confident that there will be an increase in interest rate but it will not be at a quantum that could disrupt the country’s economic growth,” he said, adding that the adjustment was viewed as a normalisation rather than a hike.
Bank Negara said while the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build-up in economic and financial imbalances.
It also said the global growth moderated in the first quarter as several key economies were affected by weather-related and policy-induced factors.
“Looking ahead, the global economy is expected to remain on a path of gradual recovery,” it said, adding that the better external environment provided further support to growth in Asia.
On top of that, it said the conditions in the international financial markets had also improved following gradual and orderly policy adjustments in the major advanced economies while the impact from geopolitical developments remained contained.
For Malaysia, Bank Negara said the latest indicators suggested that the domestic economy continued to register favourable performance in the first quarter.
It noted that growth would remain anchored by domestic demand with additional support from the improved external environment.
“Exports will continue to benefit from the recovery in the advanced economies and regional demand. Private sector spending is expected to remain robust. Investment activity is supported by broad-based capital spending, particularly in the manufacturing and services sectors,” said the central bank, adding that private consumption would be underpinned by stable income growth and favourable labour market conditions.
Bank Nagara said inflation had stabilised in recent months amid the more favourable weather conditions and as the impact of the price adjustments for utilities and energy moderated.
“Going forward, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors,” it said.