OPR hike to hurt market sentiment

FBM KLCI fell to its lowest since May 19, 2020

by S BIRRUNTHA/ pic by TMR

THE increase of the Overnight Policy Rate (OPR) to 2.25% is expected to have a negative impact on the market, according to industry analysts.

Rakuten Trade Sdn Bhd research VP Thong Pak Leng said when interest rates rise, both businesses and consumers will cut back on spending, which will cause earnings to fall and stock prices to drop.

Read more: Analysts predict OPR may hit 3 PCT In 2023

“This also means that your existing housing loan repayment will go up and your loan repayment for your new car bookings will be higher too.

“We also expect sentiment on real estate investment trusts (REITs) and properties to be impacted by the rising rates,” he told The Malaysian Reserve (TMR) when contacted yesterday.

Nevertheless, Thong said the rising interest rates are generally positive for the banks’ earnings, hence banking stocks are likely to see renewed buying interest.

He also noted that banks are also seen as a proxy to economic recovery.

The Malaysian equities closed lower today, with heavy profit-takings on plantations and energy stocks, and partly due to OPR hike.

Read more: BNM raises OPR to 2.25%

The FTSE Bursa Malaysia KLCI (FBM KLCI) fell 1.39% or 19.96 points to end at 1,420.85 on Wednesday following Bank Negara Malaysia’s (BNM) Monetary Policy Committee’s (MPC) decision to increase the OPR by 25 basis points.

The market breadth was negative with 208 losers against 717 gainers.

Thong added key regional indices ended lower, dragged by weakness in commodity prices causing heavy selldowns on energy and material stocks.

He also noted that the surge in Covid-19 infections in China also hurt market sentiment as it reignited worries about potential lockdowns.

As for the local bourse, Thong noted that the FBM KLCI fell to its lowest since May 19, 2020.

“We expect investor sentiment to remain jittery given the heightened global volatility, although bargain hunting may set in.

“We foresee the FBM KLCI to stay in consolidation mode and hover within the 1,420 to 1,440 range for the remainder of the week. Technically speaking, we spot the immediate support at 1,400 while resistance is at 1,460,” he said.

Meanwhile, Centre for Market Education CEO Dr Carmelo Ferlito said the OPR hike is expected to discourage private investments and consumption.

He said, in this way, the amount of money in circulation is reduced and therefore inflation is expected to recede.

However, Ferlito noted that interest rates are lowered during a depression in an attempt to revive both investments and consumption.

“I do not believe in automatisms in the economy, as the economy is an emergent network of human interactions. So, the hike was somehow inevitable but it is not a magic stick against inflation.

“What we need additionally is a programme of government spending cuts,” he told TMR.

Ferlito said both measures will have contractionary effects, but this is unavoidable, as the milk has been spilled (excess of money into circulation to face the disasters from the Great Lockdown).

Despite some easing in global supply chain conditions, BNM noted that inflationary pressures have continued to increase mainly due to elevated commodity prices and strong demand conditions.

“The reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activity.

“However, these have been partly offset by the impact from rising cost pressures, the military conflict in Ukraine and strict containment measures in China,” BNM said in the statement yesterday.

It added that consequently, central banks are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures.

Going forward, it said the pace of global growth is expected to moderate and will continue to be affected by elevated cost pressures, the conflict in Ukraine, global supply chain conditions and financial market volatility.

BNM also views that the Malaysian economic activity continued to strengthen in recent months as exports and retail spending indicators affirm the positive growth momentum, supported by the transition to endemicity.

It highlighted that the unemployment rate has declined further with higher labour participation and improving income prospects.

“Looking ahead, while external demand is expected to moderate, weighed by headwinds to global growth, economic growth will be supported by firm domestic demand,” it noted.

Year-to-date, BNM said headline inflation has averaged 2.4%, while it is projected to remain within the 2.2% to 3.2% forecast range for the year, and may be higher in some months due mainly to the base effect from electricity prices.

It added that underlying inflation, as measured by core inflation, is expected to average between 2% and 3% in 2022 as demand continues to improve amid the high-cost environment.