Savings now impacted by inflation

  • Economy
  • Saturday, 25 Jan 2014

Bank Negara complex

WEDNESDAY’S release of the consumer price index (CPI), which is a gauge of headline inflation, for December by the Statistics Department paints a sobering picture.

Much has been written about how consumers will feel the impact of rising prices due to the subsidy cuts and upward revision of electricity rates but the latest data shows that even savings will now be affected.

With December’s 3.2% year-on-year rise in the CPI, savers will now see negative real returns from their savings. This is because banks’ fixed deposit rates are based on Bank Negara’s overnight policy rate (OPR), which stands at 3%, unchanged since May 2011.

According to the latest monetary and financial developments statement from the central bank in November, the average fixed deposit rate for the three-month period is 2.97%, it is 2.91% for the one-month period while the average savings account rate is 1.01%.

The question is, as prices are expected to rise in the coming months with more subsidy cuts in the pipeline, will Bank Negara revise the OPR?

OPR revision depends on outlook

Savers and especially retirees with no other significant income other than from the interest derived from their bank savings, will have to grit their teeth and bear with the pain of rising prices and erosion in their savings because policymakers will not recommend a rate hike when the central bank’s monetary policy committee meets next Wednesday.

This is the conclusion of economists in their reports following the release of the Statistics Department’s CPI data. CIMB Investment Bank Bhd economic research head Lee Heng Guie tells StarBizWeek that any decision on an OPR rate hike will depend on the country’s economic growth outlook, demand-driven inflation, ringgit movement as well as capital outflows.

He says the central bank’s tolerance for negative real returns on savings will really depend on whether inflation is demand-driven or cost-driven. At this point, inflation has been cost-driven due to the subsidy cuts and higher electricity tariff rates starting from Jan 1.

“Policymakers will take a wait-and-see attitude, they’ll analyse the second-round effects to see if inflation has affected demand and if inflation is higher due to demand pressure, then they may raise the OPR,” Lee says. However, most economists believe an OPR hike unlikely from demand-driven inflation in the first-half as consumer spending has weaken.

AmResearch Sdn Bhd economist Patricia Oh says domestic demand has come off since the fourth quarter of 2013. External demand, while improving, contributes marginally to growth as net exports’ contribution to GDP has been declining over the years.

“Any rate hike will depend on how domestic demand is affected by the fiscal consolidation efforts ahead,” Oh says.

In fact, the Malaysian Institute of Economic Research consumer sentiments index fell for a second time in the third quarter of last year to 102, after falling 13.2 points to 109.7 in the second quarter on a combination of falling household incomes, less encouraging job outlook and inflation expectations.

Oh expects inflation to spike in the third quarter of 2014 at 3.5% on further subsidy cuts.

However, most expect the OPR to be raised in the second-half and only if domestic conditions permit. Citigroup Inc economist Kit Wei Zheng says in a report that while a rate hike in the second quarter is possible on upside surprises from exports and trade surpluses, there is a possibility that the hike may be delayed to the second-half of the year should fiscal consolidation take a larger toll on domestic demand than expected.

He adds that any intention to hike will likely be communicated to the market in advance via either the monetary policy committee statement or comments to media and if a March hike is in the cards, then hints of this will be found in the Wednesday statement following the policy meeting.

Furthermore, Alliance Research chief economist Manokaran Mottain says the rise in the CPI is due to businesses taking the opportunity to raise prices. “In this case, the recent data suggests that subsidy cuts (20 sen rise in RON95 petrol/diesel from Sept 3 and removal of sugar subsidy from Oct 26) has caused prices to rise,” he says.

Manokaran does not expect the central bank to raise the OPR in the coming months even as prices rise, a similar situation to the inflationary months of 2008 when the CPI rose to a high of 8.5% on a year-on-year basis in July and August due to high oil prices before tapering off in early 2009 as the global financial crisis affected growth rates and therefore, demand.

The central bank had held rates steady at 3.50% during policy meetings in May, July, August and October of 2008 before making a 25-basis point cut in November to stimulate growth, followed by a 75-basis point and 50-basis point cut in January and February of 2009 respectively, bringing the OPR to 2% all the way to January 2010.

In the decisions to raise or cut rates, policymakers were motivated by the balance of risks between growth and inflation, with the rates held steady even as inflation climbed and rate cut decisions made when the country’s exports-driven economy faltered in the wake of the financial crisis.

The ringgit and capital flows

The decision to take a wait-and-see attitude on the OPR will impact the ringgit, weakened by capital outflows in the past six months as developed economies’ outlook improved and the US Federal Reserve began to cut back on their US$85bil a month bond-buying programme undertaken to ensure interest rates stayed low.

Now that the US economy is improving, funds have started to move back to the US markets, making the greenback stronger. In fact, in the past 15 weeks to Jan 17, the local stock market has seen RM6.5bil in fund outflows. The US dollar has strengthened against the ringgit over a one-year period by nearly 9.50%.

Manokaran says the volatility in the US dollar-ringgit cross rates is short-term with the ringgit to stabilise in the second-half of the year. “In the past two years, we’ve seen a trend where the ringgit weakens in the first-half before recovering in the second-half but forecasting ringgit movements is becoming harder because the local financial system has liberalised and we’ve an open economy, thus the foreign presence is bigger than before,” he adds.

Lee says Malaysian policymakers will feel the pressure to raise rates as the Fed accelerates the cut in the bond-buying programme, which is expected to be completed by end-2014. However, he argues that any considerations for a rate hike will have to take into account the risks to economic growth.

There is also a risk that raising rates may hit households, where debt has risen to over 83% of gross domestic product (GDP), as well as corporate debt, which if including bonds and loans, may be near 100% of GDP.

However, Manokaran believes that the trigger point for a rate revision will be more capital outflows as funds seek higher returns, as is now happening.

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