No need for BNM to follow the US or the EU in tightening monetary policy

By JERRY LEE CHEE YEONG / Pic By MUHD AMIN NAHARUL

One of the major factors that has contributed to the increased volatility in global equities this year was the tightening global liquidity.

According to data compiled by Bank of America Merrill Lynch, the number of rate hikes globally is almost approaching the pre-Lehman Brothers Holdings Inc levels, indicating substantial liquidity withdrawal around the globe and this has now become one of the top concerns for most investors.

Is Malaysia joining the global monetary tightening stance in 2019?

Bank Negara Malaysia (BNM) raised the benchmark Overnight Policy Rate (OPR) by 25 basis points to 3.25% early this year.

The decision was viewed as a move to normalise monetary policy, instead of tightening it, following the rate cut in 2016 on concerns of a slow economic growth due to subdued private spending and external uncertainties like the Brexit vote.

On the tightening path, BNM is well ahead of other central banks as it started to tighten monetary policy in year 2010 after the global financial crisis, while the US Federal Reserve was on the path of loosening its monetary policy.

At this juncture, we do not see any need for the central bank to follow the footsteps of the US or the European Union (EU) in tightening the monetary policy.

Local economic growth and headline inflation are two major factors central banks would consider for the monetary policy decision.

In the recent monetary policy statement released early this month, the Monetary Policy Committee was rather sanguine about the prospect of economic growth, mentioning “the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and prolonged weakness in the mining and agriculture sectors”.

Although the inflation rate is expected to increase marginally next year due to the floating of the domestic petrol prices effective Jan 1, 2019, we believe the price pressures are likely to remain contained given the absence of strong demand pressure.

Hence, given the expectation of a moderating economic growth in 2019 and manageable headline inflation, we see no urgency for BNM to raise interest rates.

Given the expectation of no interest-rate hike in 2019 for Malaysia, bond investors might want to consider the longer duration bonds which are likely to outperform bonds with shorter durations due to the higher term premiums.

Apart from the longer duration bonds, Malaysia’s real-estate investment trusts (M-REITs) would be another sector that investors can consider, given the stable interest-rate outlook and the rather attractive dividend yield from the M-REITs, which currently hovers around the 6% level.