Economists expect another 25bps rise on Thursday

KUALA LUMPUR: Economists are expecting another rate hike from Bank Negara Malaysia (BNM) when its monetary policy committee (MPC) meets on Thursday, July 7, according to Bloomberg data.

Of the 15 research houses surveyed, 10 are expecting a 25-basis point hike in the overnight policy rate (OPR) to 3.25%.

United Overseas Bank Ltd head of research and investor relations, Jimmy Koh, expects BNM to raise the OPR by another 25bps to 3.25%, and the statutory reserve requirement (SRR) by another 1%. He also said there is a fairly good chance that the central bank would allow the ringgit to strengthen.

AmResearch Sdn Bhd expects BNM to maintain the OPR at 3% to sustain domestic demand against a backdrop of a weaker global economic landscape which may hurt exports.

However, it is anticipated the central bank raise the SRR by 1% to mitigate the build-up in liquidity which may further inflate asset prices, according to the economist.

"BNM may be looking at external conditions," he told The Edge Financial Daily on Wednesday.

He said BNM could be mindful of softer global economic growth in developed markets such as the US and Europe, and at the same time, factor in lower inflation expectations due to stabilising global commodity prices.

"We (AmResearch) are looking at slowing GDP growth Malaysia in the second quarter," he added.

AmResearch did not participate in the Bloomberg survey.

During the last MPC meeting in May BNM raised the OPR by 25bps from 2.75% to 3%. The central bank indicated that its future stance on monetary policy would depend on its assessment of risks to growth and inflation prospects.

It also increased the SRR from 2% to 3% at the May meeting. SRR is the interest-free deposit which financial institutions have to place with BNM.

HSBC Global Research in an update on Wednesday said, "With the unsettled global economic climate and supply chain disruptions having a visible impact on export data, it could be easy to come to the conclusion that BNM will not raise rates on July 7. We disagree. We look for another 25bps increase in Malaysia's policy rate tomorrow, with the central bank then remaining on hold for the rest of the year."

Malaysian exports have weakened to 5.4% in May from a year earlier, dragged down by slower sales of electrical and electronic (E&E) products, commodities, and non-E&E items. Imports also rose at a weaker rate of 5.6% as the country purchased less capital and intermediate goods.

In April, Malaysian exports grew 11% from a year earlier, while imports expanded 9.4% Economists said lower imports of capital goods suggested that business spending could slow down in the coming months while the decline in intermediate goods purchases indicated that the country's exports might ease going forward. In May, the country's inflation, as measured by the consumer price index, rose 3.3% from a year earlier.

The world economy is still clouded by concerns over the European sovereign debt crisis, according to economists, weak recovery in the US and monetary tightening in China. In Europe, sovereign debt downgrades in countries like Spain, Portugal and Greece have battered confidence in Europe, a key market for Asian goods.

CIMB Economic Research said in a recent report, "With the balance of risk tilted towards downside for the growth outlook, tempered by persistent external headwinds, we expect Bank Negara Malaysia to make a careful assessment whether the slowing growth is transitory or of a more fundamental nature at the coming MPC meeting on July 7 (today)."

It also highlighted the governor's comment in an interview that, "We have raised rates and we don't want an overreaction that produces an over-adjustment." The ringgit ended lower on Wednesday at RM3.0106 to the US dollar compared to RM3.003 on Monday on the back of news that China may see further policy tightening.

The ringgit had gained earlier in the week on expectation of another rate hike.

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