Bank Negara moves to signal low interest rate days are over

AllianceDBS Research chief economist Manokaran Mottain, who does not expect a rate cut this year, told StarBiz any move in that direction would depend on the economy

PETALING JAYA: The 25-basis-point (bps) hike in the benchmark overnight policy rate (OPR) to 3.25% by Bank Negara signals that the days of low interest rates are over.

Although analysts see a 25-bps hike as having minimal impact on private consumption, a hike in the OPR will benefit banks, as they will adjust their deposit and lending rates higher.

While savers, especially retirees, will see a better rate of return on their deposits, consumers will be faced with higher interest rates at a time when inflation has climbed to the highest in nine years and cost-of-living issues dominate the political discourse.

AllianceDBS Research chief economist Manokaran Mottain said the hike will directly increase the base financing rate by as much as 25bps and deposit rates by as much as 20bps. “For the banking industry, the rate hike means higher margins from variable rate products,” he said in a report.

CIMB Group Holdings Bhd chief executive Tengku Datuk Seri Zafrul Aziz said in a statement that the market would be able to absorb the widely anticipated rate hike, particularly with the stronger ringgit and the government having a firm grip on inflation.

He does not expect another hike in the near term, but said the bank “is ever ready and well-equipped to help our customers navigate interest rate hikes and other business challenges, whether in Malaysia or in Asean”.

Banking stocks, which rose in mid-afternoon trade following the rate-hike announcement, closed higher, supporting the 8.82-point gain in the local bourse’s benchmark FBM KLCI, which closed at 1,845.86, the highest since April 2015.

Public Bank Bhd gained 24 sen to close at an all-time high of RM21.20. Malayan Banking Bhd rose nine sen to RM10 and CIMB added seven sen to RM7.02.

RHB Bank Bhd was up six sen to RM5.40, Hong Leong Bank Bhd rose 14 sen to RM18.14, AMMB Holdings Bhd was five sen higher at RM4.80, Alliance Bank Bhd gained four sen to RM4.26, BIMB Holdings Bhd added six sen to RM4.06 while Affin Holdings Bhd slid two sen to RM13.16.

The ringgit closed higher against the US dollar at 3.895. Year-to-date, the US dollar has weakened 3.33% against the ringgit. Remarks by US President Donald Trump last year and Treasury Secretary Steven Mnuchin on Jan 24 that they favour a weaker greenback to help boost exports have pulled the US dollar lower.

Citigroup Inc economist Kit Wei Zheng said the house remains bullish on the ringgit and targets a move to 3.80 amidst supportive fundamentals and broad US dollar weakness.

He believes that another rate hike may still be on the cards and that the market will expect it if the macroeconomic data remains strong.

“With the output gap turning positive, elevated perceived price inflation, and wage growth accelerating, we continue to tentatively pencil in another hike in the third quarter,” Kit said.

Bank Negara said in a statement that the monetary policy committee (MPC) decided to raise the key rate as the economy was on a steady growth path.

“At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time,” it said.

The central bank noted that the latest indicators reaffirmed the strength in exports and domestic activity. “Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy,” it said, adding that monetary policy remains accommodative and policymakers will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation.

It noted that core inflation remains moderate, but the trajectory of headline inflation will be dependent on oil prices that remain highly uncertain.

Describing the central bank’s decision to raise the key rate as a tough one, Manokaran said the hike was partly due to the high inflation while low interest rates coupled with the strong growth momentum may result in financial imbalances.

“Overall, we do not see this to be the start of a monetary tightening process. In other words, we do not expect any more hikes for the next 12 months, at least,” he said.