OPR up 25 basis points, after 3 years at 3%

PETALING JAYA: Bank Negara Malaysia's decision to increase the Overnight Policy Rate (OPR), after three years of keeping it at 3%, by 25 basis points (bps) to 3.25% is cognisant of the possibility of instability in the financial system due to prolonged low interest rates, said Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew.
"The rate hike is in line with market expectations and plenty of warnings have been given. With the rate hike, the treasury position might improve, enabling the government to direct spending towards areas of the economy where they want to encourage growth," he told SunBiz yesterday.
Pong said sectors that are highly leveraged with high gearing will be affected the most by the hike, namely steel, property and power producers.
"The banks will benefit from this rate hike if they quickly raise (interest rates) but if they wait, the benefit will be watered down. The trend is, banks have been enjoying slimmer lending margins, so this is a short term benefit for them," he said.
Franklin Templeton GSC Asset Management Malaysian Fixed Income & Sukuk executive director and head Hanifah Hashim concurred that it was the right time to increase rates, considering the negative carry experienced by investors, with deposit rate tracking OPR at 3.00%, which is lower than the inflation rate of 3.2%.
"As such, OPR needs to be adjusted to provide a positive or neutral carry to investors in order to encourage savings," she said.
Hong Leong Investment Bank Research (HLIB) in its note yesterday opined that a 25 bps rate hike will have a 3% impact on monthly payments.
"Our simulation study suggests that in the current base case (base lending rate (BLR) of minus 2.4%), a RM3,000 per month installment amount will be able to afford a property worth RM681,000. A 25bps rate hike will reduce the affordable property price by 2.92% to RM662,000," it said, adding that a hike will prolong the subdued sentiment towards the property market.
In a statement released after its much-talked-about Monetary Policy Committee (MPC) meeting yesterday, the central bank confirmed the consensus view that a hike was on the cards, saying that the decision was driven by firm growth prospects in exports and private sector activity and inflation remaining above its long-run average.
The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00% and 3.50% respectively.
"This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy. At the new level of the OPR, the stance of monetary policy remains supportive of the economy."
"Further review of the degree of monetary accommodation will depend on the MPC's assessment of the balance of risks surrounding the outlook for domestic growth and inflation. At the same time, the MPC will also continue to monitor for risks of destabilising financial imbalances, " Bank Negara said.
UOB Economic-Treasury Research in its note following the announcement said that it expects Bank Negara to stay its hands at the next meeting on Sept 18, 2014.
"We maintain our forecast that the central bank will raise its OPR by another 25 bps in 1Q15 before the GST takes effect. That would restore the OPR back to pre-Lehman level," it added.
Alliance DBS also expects the OPR to remain unchanged for the rest of the year at 3.25%.