Analysts expect Bank Negara to keep OPR at 3% for rest of 2017

PETALING JAYA: Analysts foresee that Bank Negara Malaysia (BNM) would likely keep the Overnight Policy Rate (OPR) unchanged for the rest of the year, following a largely expected decision for the Monetary Policy Committee to leave it at 3% last Thursday.

In a report last Friday, Kenanga Research said it believes that inflation would likely remain manageable and gradually taper off towards year end, despite the possible tightness in global oil supplies and improved domestic demand.
“With just one more scheduled monetary policy meeting for the year in November, we do not see any striking reasons to alter the current 3% OPR for the rest of the year as inflation is likely to have peaked in March,” it said.
On a separate note, AmBank Research reiterated its base case view of no rate hike this year, as BNM will continue to weigh between growth prospects and inflation.
“With the ringgit expected to stay healthy as our fair value is between 4.12 – 4.15 against the US dollar, our full-year average outlook is at 4.33.”
Therefore, it said room for ringgit to stay firm remains, suggesting it should help ease pressure from import cost and limit the risk of potential transfer pricing.
Nonetheless, PublicInvest Research pointed that demand-driven inflation could rise given the strong first half of 2017 (1H17) growth, leading it to be slightly cautious for the remainder of the year over the central bank’s policy outlook.
The research house projected 2H17 inflation to average at 3.5% against 1H17’s average of 4.1%, while core inflation is expected to inch-up slightly to 2.7% in 2H17 against the 2.6% in 1H17.
“The absence of exogeneous shocks and negligible demand-driven inflation suggests that OPR may be left at 3% for the remainder of 2017, which we cautiously expect. BNM may put a growth mandate as its main priority for now.”
On the other hand, Malaysian Rating Corp Bhd (MARC) said it believes that the third quarter economic performance will be key to BNM’s future rate hike decision.
Its chief economist Nor Zahidi Alias reiterated that if the economy’s performance continues to beat expectations in the rest of the year, the chances of a rate hike will be higher.
“However, we believe BNM will also take into account rising geopolitical risks before making its decision,” he added.
In addition, Nor Zahidi said the rating agency is of view that the central bank will not rush to push up rates due to several reasons unless the third quarter economic performance continues to beat expectations.
“First, inflation in 1H17 has been largely driven by cost factor. In particular, the rise in petrol prices (RON95) explains the major increase in inflation in 1H17. The price of RON95 bottomed out in March 2016 at RM1.60 per litre and has been on the rise since then.
“Not surprisingly, consumer price index (CPI) growth hit a peak of 5.1% in March 2017. On the other hand, demand-driven factors remain benign, judging by the trend of core CPI which remained stable at an average of 2.5% in the year-to-date. This suggests the lack of a widespread upward price pressure in the economy.”
Going forward, MARC expects the headline inflation rate to moderate and will average circa 3.5% in 2017 according to its estimate.