No change expected for OPR, another hike for SRR

KUALA LUMPUR: The consensus view among economists on the overnight policy rate (OPR) is that it will stay put on Thursday, May 5 when the Monetary Policy Committee under Bank Negara Malaysia (BNM) meets, although it is expected to be restored gradually to the pre-crisis level within this year.

The statutory reserve requirement (SRR) is expected to be raised possibly by another 100 bps to 3%.

From a Bloomberg survey of 16 economists, nine expect the OPR to stand still at 2.75% while seven anticipate the OPR to be raised 25 bps to 3%.

BNM has left the OPR unchanged at 2.75% since last July but raised the SRR by 100 bps to 2% in March.

Lee Heng Guie, head of economic research at CIMB Research, said the country's growth was a priority over the risk of inflation and a strong motivation for BNM to maintain the OPR.

"While headline inflation headed higher in recent months, it is not at a tipping point yet," said Lee.

The "tipping point" for inflation, according to Lee, is between 3.5% and 4.0% on a sustained basis.

The country's inflation, as measured by the consumer price index, accelerated to 3% year-on-year in March — the highest since April 2009. Inflation was 2.9% in February.

A Bloomberg survey had predicted an increase of 3.1%. April's inflation data is due for release on May 31.

"It is also necessary to assess the source, whether it is demand-pull or cost-push. We need to see if it is transitory or permanent, and most importantly, whether the rate of inflation will trigger a wage-price spiral," Lee told The Edge Financial Daily.

Lee added that maintaining the OPR in the near-term will give time for the central bank to assess the impact of Japan's earthquake on the country's manufacturing supply chain.

"Most companies, especially in the automotive sector, indicated that inventories should see them through the next two to three months. Disruption in supply chain and production is expected to surface in 2Q11 and 3Q11," Lee said.

"Given the continuing impact of weaker than expected export growth amid still tolerable inflation, we think the first rate hike will only come in July instead of May."

Lee maintained his year-end target of 3.25% for the OPR.

However, Lee expected BNM to raise the SRR ratio by 100 bps to 3% in order to absorb excess liquidity from the system, while curtailing credit creation.

The SRR was reduced to 4% after the 1997/1998 Asian financial crisis and was retained at that level up to 2008.

Following the global credit crunch, BNM cut the SRR to 1% in March 2009 to improve liquidity in the financial system.

MIDF head of research Zulkifli Hamzah also does not foresee an increase in the OPR.

"We do not expect BNM to raise the OPR on May 5, but we do expect a greater tendency for the bank to raise the SRR," Zulkifli said.

Prior to July when BNM last raised the OPR, it was tightened three times in a row by a quantum of 25 bps each.

At the height of the global financial crisis, the OPR underwent three consecutive cuts from November 2008 to February 2009 when it was trimmed by 125 bps to 2.0% from 3.25%.

In its annual report released in March, the central bank had emphasised the growing threat of inflation.

"Compared with 2010, when monetary policy focused on preventing the risk of financial imbalances and sustaining economic growth, the upside risks to inflation have become increasingly visible in 2011," BNM said.

"Monetary policy in 2011 has the flexibility to remain accommodative, although the degree of accommodation may need to be adjusted to ensure that economic growth in the medium term will not be damaged by higher inflation."