HSBC Global Research expects next OPR hike only in 1Q19

KUALA LUMPUR (April 27): Given a trend of subdued core inflation, Bank Negara Malaysia’s next interest rate hike will likely occur only in the first quarter of 2019 (1Q19), and the hiking cycle will be very gradual, according to a projection by HSBC Global Research.

In an Asean Perspectives report, HSBC observed Malaysia has grown above its potential for the past four years. The bank estimated the country’s medium-term potential growth at 4% to 4.2%, although it also expects Malaysia to continue to develop above potential in the near term.

“Growth in Malaysia has actually been far more diversified and broad-based. Its exports, for instance, are a mix of electronics, machinery, and commodities (palm oil and liquefied natural gas), which means that it not only benefits from an upswing in the commodities cycle but also in the tech cycle.

“But above-potential growth also comes at a high price [quite literally], as we saw inflation in 2017 reach its highest level in almost a decade,” it added, noting that most of the inflation was due to higher oil prices.

The central bank’s last rate hike was in January when the overnight policy rate (OPR) was increased by 25 basis points to 3.25%.

In its report, HSBC also projected public infrastructure investments would accelerate further in the near term due in part to the One Belt, One Road initiative projects while private investment growth may slow.

Although the additional infrastructure capacity could help contain inflation over the long term, HSBC cautions inflationary pressures could return in the short term as Malaysia continues to grow above its potential.

Meanwhile, on the regional front, the report found that some Asean countries, namely Malaysia, Thailand and Vietnam, grew above potential with positive output gaps in 2017. On the other hand, the negative output gaps in Singapore and Indonesia closed to one of their narrowest levels in recent years in 2017.

Despite this above-potential growth in some countries in the region, HSBC does not foresee any significant risk of overheating for now.

“Overheating is seen when an economy has experienced a prolonged period of high-economic growth leading to high levels of inflation. We don’t believe this is happening in most Asean countries,” it said.

The Philippines is perhaps the country in Asean that most market watchers fear is at risk of overheating due to robust growth in recent years with inflation now breaching above the central bank’s 2%-4% target range.

However, HSBC has a differing view, noting that despite growing above potential in four of the past six years, the Philippines has been running below potential since 2016.

This article first appeared in The Edge Financial Daily, on April 27, 2018.

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