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Mixed views on rate hike in Malaysia
Publication Date : 19-08-2014
While economists are mostly on the same page about upgrading their full-year economic growth forecast for Malaysia following two quarters of spectacular performance, their opinions on the next interest rate hike are divided.
Of the 12 economists polled by StarBiz, five reckon that Central Bank would raise the overnight policy rate (OPR) by 25 basis points (bps) to 3.5 per cent at the next Monetary Policy Committee (MPC) meeting on Sept 18, while one believes the next rate hike could happen either next month or at the final MPC meeting for the year in November.
The other six economists believe that Central Bankwould keep the OPR at 3.25 per cent through 2014, after having raised it by 25 bps for the first time since May 2011 last month.
The group of economists who believe that a second round of rate hike is necessary in September based its argument on the need to address the negative real interest rate situation in Malaysia, strengthen financial stability and further anchor inflationary expectations.
CIMB Investment Bank economist Julia Goh, for one, said: “We think that another 25-basis-point rate hike will help to ensure that the average real rate of return on deposit growth remains positive over the medium to long-term period.
“Lingering inflation risks, financial imbalances and strong growth provide room for Central Bank to raise rates next month,” Goh told StarBiz in an email.
Nomura Research economist Euben Paracuelles, who shared Goh’s sentiment, pointed out that inflation in Malaysia, which was already at elevated levels, was set to rise further, especially upon the implementation of the goods and services tax (GST) in April next year, and this, he noted, would likely push real policy rates further into negative territory.
“Left unchecked, this could fuel more concerns over financial stability, especially if growth remains robust,” Paracuelles explained in his report. “We note that Central Bank governor Dr Zeti Akhtar Aziz had already described the first-quarter growth as ‘exceptional’, yet the second-quarter growth was even stronger.”
Malaysia’s gross domestic product (GDP) in the three months to June 2014 grew 6.4 per cent, the highest pace in six quarters, and beat market expectations, thanks to strong export growth and robust private domestic demand.
In the first quarter of the year, the country’s economy expanded 6.2 per cent.
The strong numbers lifted Malaysia’s GDP growth for the first six months of 2014 to 6.3 per cent, compared with 5.5 per cent in the corresponding period last year.
According to Central Bank, the country’s inflation rate is expected to average around 3-4 per cent this year, but the implementation of the GST next year would push up the inflation rate temporarily. Malaysia’s inflation rate, as measured by the annual change in the consumer price index, stood at 3.35 per cent in the first half of the year.
Meanwhile, economists who believe that Central Bank would unlikely raise the OPR again at least until the first half of 2015 were of the opinion that Malaysia’s inflation rate was manageable.
They argued that the rate hike in July was sufficient for the moment to gradually address the financial imbalances in Malaysia, and that a second round of rate hike would only weigh on the country’s domestic demand and external sector, and hence, economic growth.
According to AmResearch economist Patricia Oh, the recent OPR hike, coupled with other macro-prudential measures, would help to ensure that Malaysia’s household indebtedness remains in check.
M&A Securities head of research Rosnani Rasul, on the other hand, pointed out that Central Bank had in its latest monetary statement said the current rate was conducive for the country’s economy.
Rosnani noted in her report that there was no good reason for Malaysia to adjust its policy rates again until next year, as the country’s interest-rate differential against the United States was still at a comfortable level, and that the latter was unlikely to make any policy adjustments soon.
“Further upward adjustment in the OPR this year will only strengthen the ringgit, and that will choke export performance,” she argued.
Divided views on the next OPR hike aside, economists have raised their growth projection for Malaysia’s economy this year. This was in line with Zeti’s statement that the country’s GDP growth in 2014 would likely exceed Central Bank’s forecast range of 4.5-5.5 per cent.
Based on StarBiz’s poll of economists, the average forecast for Malaysia’s GDP growth this year has been revised up to 5.8 per cent, with three economists projecting growth to reach as much as 6 per cent this year.
While economists concurred that the country’s growth in the second half would moderate, they believe that domestic demand, especially private investment, would remain robust and the exports sector would continue to grow amid the ongoing recovery of the global economy. These factors, economists said, would support Malaysia’s economy through 2014.
“Although domestic demand growth will likely moderate in the second half, dampened by slowing government spending due to the fiscal consolidation drive and curbs on the property market, it will likely remain resilient and act as the main anchor of growth during the year,” RHB Research chief economist Peck Boon Soon said in his report.
“We expect consumer spending to hold up and private investment to remain relatively strong amid elevated price pressures,” he added.