Rise in OPR soon unlikely due to rising household debt — MARC

KUALA LUMPUR (Sept 8): Bank Negara Malaysia is unlikely to risk raising the overnight policy rate (OPR) too soon as it can affect consumers' debt service capacity, says Malaysian Rating Corp Bhd (MARC).

The rating firm pointed out that Malaysia's household debt currently stands close to 90% of the gross domestic product (GDP) — compared with 79.8% in Thailand and 75.3% in Singapore.

"BNM has been managing household debt cautiously in order to not affect the economy, especially private consumption," MARC said in a report, following the decision by BNM's monetary policy committee yesterday to keep the OPR at 3%.

"All in all, MARC feels that the third quarter economic performance will be key to BNM's future rate hike decision. If the economy's performance continues to beat expectations in the rest of the year, the chances of a rate hike will be higher," the rating firm added, noting that the central bank will also take into account rising geopolitical risks prior to making its decision.

Given improving headline inflation and recovery of the country's economic growth, MARC said speculation is now rife that a rate hike is on the cards in the near term.

"Real GDP growth which averaged at 5.7% in the first six months of this year (1H17) was the strongest since 1H14. With the United States' economy continuing to register a decent growth and the European economy firming up significantly, expectations that demand-pull factors may emerge and push up the inflation rate in the near term have slowly resurfaced," the rating firm added.

Unless the third quarter economic performance continues to beat expectations, MARC said BNM will not rush to push up the OPR, citing four reasons.

First, the inflation in 1H17 was largely driven by cost factor, but will moderate to around 3.5% in 2017. This was supported by the central bank's soft tone to describe the inflation, which has softened.

"We believe that such a description provides an overall feeling that there is no urgent need for a policy intervention to diffuse higher inflation rate, unless growth continues to accelerate in the upcoming quarter," MARC said.

Second, MARC said Malaysia's output gap has remained negative despite the recent surge in real GDP growth rates, where the actual output is below its potential output recorded in 1H17.

Third, MARC said capital outflows have subsided by 2Q17, as compared to the period immediately after the US election in November 2016, when huge outflows caused some speculation that the OPR would be raised to stem the flow.

"In fact, in the three months ended June 2017, the Malaysian bond market recorded an average foreign inflow of RM5.5 billion, compared with an average outflow of RM12.5 billion in 1Q17. As the situation has improved quite significantly, there is now no urgency for a rate hike in the near term," the rating firm added.

Fourth, MARC said the interest rates in regional countries such as Thailand, Indonesia, and Vietnam have been on the downtrend.

"The accommodative stance adopted by Asean central banks has been due to uneven recovery of the global economy. With other countries maintaining an accommodative monetary stance, a rate hike in the OPR would likely induce capital inflows into Malaysian shores and complicate the management of liquidity and inflation in the economy," the firm noted. — theedgemarkets.com

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