Low inflation, ringgit strength seen keeping OPR at 3.25%

The central bank MPC will meet tomorrow to decide whether there is a case to raise the OPR


Bank Negara Malaysia (BNM) is expected to maintain interest rates for the year as inflationary pressures subside after the widely unpopular consumption tax was dropped to zero rate and ringgit continues to bene t from the higher global crude prices.

The central bank Monetary Policy Committee (MPC) will meet tomorrow to decide whether there is a case to raise the Overnight Policy Rate (OPR), which stands at 3.25%.

Malaysia’s neighbour Indonesia raised interest rates twice in May as Jakarta tried to defend its falling currency.

The ringgit has weakened from a 52-week high of RM3.85 to RM4.02 presently, but the drop has been mitigated by the increase in crude oil prices, a key export for the country.

“We expect the central bank to keep the OPR on hold at 3.25% and maintain a ‘Neutral’ stance. The effective zero-rating of the Goods and Services Tax as of June 1 is likely to result in a one-off dip in inflation,” said Standard Chartered Bank (StanChart) chief economist for Asean and South Asia Edward Lee in a recent note.

He said BNM would likely look past the volatility in inflation and focus on growth in its monetary policy decision-making.

Lee said the bank is keeping to its projections for Malaysia’s 2018 economic growth of 5.3% as it expects growth to “moderate from strong levels in 2017, but remain firm”.

Last year, the economy grew 5.9%, but was also accompanied by high inflation.

Central banks have often used interest rates to defend their currency from major drops.

Other research houses anticipate the interest rates to remain unchanged until year-end based on the strong economic growth and inflation levels.

AmInvestment Bank Bhd said it expects the OPR to be kept at 3.25% throughout the year to support the domestic economy.

Australia and New Zealand Banking Group Ltd Research does not foresee any change in the OPR for the rest of 2018, while Maybank Investment Bank Bhd said the central bank would likely maintain the OPR at its present rate until end-2019.

BNM last hiked the rate on Jan 25 to 3.25% from 3%. This was the first hike since 2014 in light of global and domestic economic conditions and to curb risks arising from the long periods of the low interest-rate regime.

The central monetary authority’s last move prior to the hike was to cut the OPR to 3% from 3.25% in July 2016, a step aimed at protecting the country from global headwinds including the UK’s vote in 2016 to exit the European Union.

Separately, StanChart expects Malaysia’s industrial production growth to ease to 2.8% year-on-year (YoY) from 4.6% in April, due to three fewer working days in May this year as the election polling day and two days post-election were declared holidays.

“We think the mining sector was supported by a pickup in crude oil production (3.4% YoY) likely due to higher oil prices. However, the sector may have been weighed down by a 7.8% YoY fall in crude palm oil (CPO) production due to lower CPO prices.

“Passenger car production fell 7.5% YoY and probably also weighed on overall industrial production growth,” Lee said.