KUALA LUMPUR (Jan 26): As expected, Bank Negara Malaysia (BNM) raised its key interest rate by 25 basis points (bps) to 3.25% at its policy meeting yesterday — its first hike since July 2014. While some economists had previously estimated two rate hikes this year, they now expect the central bank to hold back its next policy move.

The last revision of BNM’s overnight policy rate (OPR) was in July 2014 when it was raised by 25bps to 3.25%. In July 2016, however, the central bank reduced the rate to 3% on concerns about slow growth and possible risks from Britain’s Brexit vote.

In a statement yesterday, the BNM said the decision to normalise the OPR was backed by the firm growth of the economy, adding that the monetary policy committee (MPC) recognised the need to ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that can emerge from low interest rates for a prolonged time.

“At the current level of the OPR, the stance of monetary policy remains accommodative. The MPC will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation,” it added.

In a separate statement yesterday, CIMB Group Holdings Bhd group chief executive officer Tengku Datuk Seri Zafrul Abdul Aziz said after yesterday’s hike, he does not expect any further rate increases in the near term.

“Going forward, we feel that this is still supportive of Malaysia’s current strong growth trajectory. The modest 25bps hike is something that we feel the market is able to absorb, particularly with the stronger ringgit and with the government having a firm grip on inflation,” he said.

“But whatever the macro situation, CIMB is ever-ready and well equipped to help our customers navigate interest rate hikes and other business challenges, whether in Malaysia or in Asean,” Zafrul added.

Hong Leong Investment Bank Bhd economist Felicia Ling Xiao Wei also said the hike was largely expected based on the favourable growth momentum seen over the past year.

“Our expectation was for BNM to normalise the policy rate as early as the January MPC meeting. This was anticipated as growth momentum had been favourable, while real interest rates were in the negative territory for 12 consecutive months.

“[However,] we feel that any future policy moves will be data-dependent,” she told The Edge Financial Daily.

UOB Kay Hian senior vice-president of global economics and market research Julia Goh, who had previously expected two rate increases in 2018, now expects BNM to hold off on any hike as the latter seems to be “neutral” on the future monetary policy direction.

“We concur that robust growth conditions allow BNM to unwind the previous cut that was done in July 2016. However, we think the statement sounded ‘neutral’ on its future monetary policy direction,” she said, referring to the central bank’s statement yesterday that the stance of monetary policy remains accommodative at the current OPR level.

“As such, BNM is likely to adopt a wait-and-see view and assess further data trends or events before deciding if further adjustment to monetary policy is needed,” added Goh.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias also does not expect another hike within the year, although he does not fully discount that possibility.

He said headline gross domestic product (GDP) growth was resilient in 2017, beating economists’ expectations in the first three quarters of the year and expects growth to remain above 5% in 2018. He noted that four economies out of the Asean-5 expanded above their average growth rates in 2017.

“Going forward, we do not expect any more rate increases this year unless Malaysia’s headline GDP growth continues to surprise on the upside — and that could only happen by year end, if at all,” Nor Zahidi said.

For DBS Group Research economist Irvin Seah, he still expects another 25bps rate hike this year although the central bank is likely to hold back its next policy move until after the general election.

“Specifically, we expect BNM to raise the OPR by another 25bps to 3.5% in the third quarter of 2018. The risk remains for inflation to move up again in the latter half of the year. By then, it would also be timely to realign rates to higher US and regional rates,” he said in a note to clients.

“In between, the risk of a hike in the statutory reserve requirement ratio should not be discounted as well,” added Seah.

This article first appeared in The Edge Financial Daily, on Jan 26, 2018.

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