Brace for interest rate hike

  • Economy
  • Friday, 10 Nov 2017

Although the OPR was maintained at 3%, the central bank said policymakers may consider reviewing the current degree of monetary accommodation, given the strength of the global and domestic macroeconomic conditions.

PETALING JAYA: Bank Negara gave its strongest signal yet that the benchmark overnight policy rate (OPR) may be raised following a meeting of policymakers yesterday.

Although the OPR was maintained at 3%, the central bank said policymakers may consider reviewing the current degree of monetary accommodation, given the strength of the global and domestic macroeconomic conditions.

“This is to ensure the sustainability of the growth prospects of the Malaysian economy,” it said.

The ringgit rose against the US dollar, euro, pound sterling and Singapore dollar following the statement by the central bank policymakers.

Singapore-based Nomura Holdings Inc economist Euben Paracuelles said the statement appeared to signal the possibility of an OPR hike next year.

“While our base case had been for Bank Negara to leave its policy rate unchanged through the rest of this year and 2018, we have noted that if financial-imbalance risks continued to build, the probability of rate hikes could rise as Bank Negara seeks to eventually, but gradually, normalise policy from an accommodative stance,” he said.

The central bank last raised the OPR, which commercial banks refer to in pricing their lending rates, in July 2014, when the benchmark rate was raised 25 basis points to 3.25%. This was later slashed by 25 basis points to 3% in July last year to support domestic economic activities.

Economists said the next monetary policy committee meeting, scheduled for Jan 24-25, would be closely watched.

Citigroup Inc economist Kit Wei Zheng said similar language was used in the policy statements in March 2011 and May 2014, which was then followed by a rate hike.

“Notwithstanding dovish forecasts by other market participants, we consistently noted that the monetary policy committee’s bias would be towards normalising monetary conditions, and the possibility of hawkish language today.

“We expect a 25-basis OPR hike in January 2018, with a further hike in 2018 possible, though this is data dependent,” he noted.

Kit said the central bank may not stand in the way of ringgit strength.

He said the reasons to hike early included smaller-than-expected economic slack with third-quarter growth to accelerate to above 6% year-on-year, expansionary fiscal policy providing room for monetary normalisation and hawkish rhetoric from other central banks to the extent that global monetary conditions matter.

The US Federal Reserve has raised the federal funds rate twice this year and the market expects another hike in December while the Bank of England raised the benchmark interest rate a week ago for the first time since 2007.

The European Central Bank has also unveiled plans to cut back on its quantitative easing programme next year, which in effect will see interest rates start to rise.

Bank Negara said in the statement that the country’s economic growth has become more entrenched and synchronised across regions and would remain strong next year.

“Growth momentum has been lifted by stronger spillovers from the external sector to the domestic economy as firms invest in productive capacity, raise wages and hire more workers,” it said.

It pointed out that for 2018, domestic demand would be the key source of growth, aided by the external sector. Private consumption would remain the largest driver of growth, supported by continued improvements in income and overall labour market conditions.

“Investment will be sustained by infrastructure projects and higher capital spending in the manufacturing and services sectors.

“The external sector will provide additional impetus to the economy. Overall, the assessment is for growth to remain strong in 2018,” it said.

For the first half of the year, Malaysia’s economic performance has been responding well to the pick-up in global trade, posting higher-than-expected gross domestic product growth of 5.6% and 5.8% in the first and second quarters, respectively.

“At the current level of the OPR, the stance of monetary policy remains accommodative,” the central bank said.

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