Higher OPR not likely for now, says MARC

MARC forsees no rate hike if the economy’s performance continues to beat expectations

By NG MIN SHEN / Pic By TMRpic

Bank Negara Malaysia (BNM) is not likely to raise the Overnight Policy Rate (OPR) soon due to the implications that would trickle down to consumers, despite the improved domestic headline growth earlier this year.

Following BNM’s decision last Thursday to maintain the OPR at 3%, Malaysian Rating Corp Bhd (MARC) said it does not foresee a rush by the central bank to push up rates unless the country’s third-quarter of 2017 (3Q17) economic performance continues to defy all odds.

“If the economy’s performance continues to beat expectations in the rest of the year, the chances of a rate hike will be higher.

“However, we believe BNM will also take into account rising geopolitical risks before making its decision,” it said in a report recently.

The rate hike in the near term was earlier speculated as a reaction to the stability shown in US and European markets.

The central bank had said it would maintain the key policy rate at its current level as it remains accommodative, while core inflation is expected to be contained and domestic demand will remain the key driver of economic growth in the near future.

MARC said despite the 5.8% growth in gross domestic product (GDP) in 2Q17 after a 5.6% rise in 1Q17, the country’s output gap has remained negative, with actual output below the potential output.

Private consumption — a key determinant in a rate hike decision — has not surpassed its trend growth in the first-half of the year (1H17) either, despite having recovered from its low in 3Q15.

The Goods and Services Tax collection, meanwhile, is anticipated to moderate to RM40 billion in 2017, down from RM41.2 billion in 2016, as consumers are still being adversely affected by the weaker ringgit.

“Malaysia’s high household debt is a major concern when it comes to a rate increase decision. At close to 90% of nominal GDP, Malaysia’s household debt is one of the highest in Asia (Thailand’s was 79.8% in 2016, Singapore’s 75.3%). BNM has been managing household debt cautiously in order to not affect the economy, especially private consumption.

“As such, it may not likely want to risk raising the OPR too soon as it can affect consumers’ debt service capacity,” the rating agency said.

Headline inflation is expected to moderate with an average of circa 3.5% in 2017 as per MARC’s estimates after being largely driven by higher petrol prices during 1H17, as demand-driven factors remain benign judging by the core Consumer Price Index which remained stable at an average of 2.5% in the year-to-date.

“This suggests the lack of a widespread upward price pressure in the economy. Going forward, headline inflation is expected to moderate and will average circa 3.5% in 2017 according to our estimate,” it said.

It noted BNM’s description of the intensity of inflation has softened from being dependent on “highly uncertain” global oil prices to expectations for moderation due to “a smaller effect of global cost factors”.

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

In the capital markets, the period immediately after the US elections in November 2016 saw huge outflows leading to rumours that the OPR would be raised to stem the flow.

However, capital outflows subsided by 2Q17. The Malaysian bond market recorded an average foreign inflow of RM5.5 billion for the three months ended June 2017, compared to an average outflow of RM12.5 billion in 1Q17.

MARC said as the situation has improved significantly, there is no longer an urgency for a rate hike in the near term.

Interest rates have also been on the downtrend regionally. Indonesia recently reduced its seven-day reverse repo rate from a peak of 6.3% in late 2015 to 4.5% recently. Similarly, Thailand has maintained its policy rate at 1.5%, the lowest since mid-2010, while Vietnam’s policy rate was decreased to 4.25% in July 2017, the lowest since November 2005.

“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,” MARC said.