Bank Negara seen keeping OPR unchanged at 3.25% despite rosier outlook

KUALA LUMPUR (March 30): Several economists have kept their end-2018 overnight policy rate (OPR) forecast unchanged at 3.25% for Malaysia, despite Bank Negara Malaysia’s (BNM) more rosy growth projection for the country.

In a note yesterday, UOB Malaysia senior economist Julia Goh said the central bank projected GDP growth of 5.5% to 6% for 2018 (a point estimate of 5.7%), a higher range compared with the finance ministry’s forecast of 5% to 5.5% announced last October.

“The upgrade brings growth almost on a par with the 5.9% achieved in 2017. [But] despite [a] strong pickup in GDP, BNM views that productivity enhancements will help mitigate price pressures. This reaffirms our view that the OPR will be kept unchanged at 3.25% for the rest of the year,” said Goh.

Similarly, two CIMB Investment Bank Bhd economists, Michelle Chia and Lim Yee Ping, noted that BNM’s growth forecast is “a tad higher than our forecast of 5.2% and the Bloomberg consensus estimate of 5.4%”.

Nevertheless, they too maintained their end-2018 OPR forecast at 3.25% for Malaysia, and expect any hike to come only in 2019.

“Our key takeaways from the briefing and report are BNM may be closer to the next interest rate increase than we had thought, as it expects the output gap to turn positive, but weak inflation is buying policymakers some time to wait for improvements in consumer sentiment, for evidence of more equitable distribution of economic gains, and for assurance that external risks remain at bay,” the duo wrote.

Domestic inflation, therefore, is the key barometer to assess a change in policy stance. “So is BNM a hawk in dove’s clothing? We think not yet, but it leads its Asean peers in the process of interest rate normalisation,” they noted.

TA Securities Holdings Bhd, meanwhile, said it does not see much pressure for the central bank to change its accommodative monetary policy stance this year after the last 25-basis-point hike in January. TA pointed to factors like moderate inflation, modest growth in Malaysia’s real gross domestic product and a strong ringgit against the US dollar.

“Despite the US interest rate hike and gradual monetary tightening going forward, we do not foresee further changes in Malaysia’s OPR this year,” TA said.

The economists’ notes were issued after the release of BNM’s 2017 annual report on Wednesday. BNM has projected that Malaysia’s 2018 headline inflation will average between 2% and 3% — moderating from 2.7% in 2017 — taking into account a higher base in 2017 and stronger ringgit.

This article first appeared in The Edge Financial Daily, on March 30, 2018.

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