Split on odds of interest rate hike in 2018

PETALING JAYA: Analysts are mixed as to whether Bank Negara Malaysia will increase the Overnight Policy Rate (OPR), the benchmark interest rate, next year, with AmBank Research expecting two increases and PublicInvest Research none at all.
AmBank Research said it expects Bank Negara Malaysia (BNM) to initiate its first rate increase by 25 basis point (bps) in January 2018 and another 25 bps hike in the third quarter of 2018 (Q3 2018), which should normalise the OPR to 3.5%.
It said in a note today that the economy, underpinned by inflationary pressure, has been in negative returns since January and added that with the strong gross domestic product (GDP) growth and healthy private wages, there are strong signs for interest rate increases next year.
The research house projects inflation to stay around 4.0% this year and between 2.5% and 3.0% for 2018.
It said headline inflation in October rose 3.7% as both food and non-food prices grew at a slower pace by 4.4% year-on-year (y-o-y) and 3.4% y-o-y respectively, while fuel prices climbed 20.5% y-o-y.
During the period, it said, core inflation remained stable at 2.3% y-o-y and is expected to inch up in the coming months fuelled by a stronger average GDP growth of 5.9% for three quarters and increase in private sector wages, which were up 7.3% y-o-y in Q3 2017 for the second consecutive quarter.
PublicInvest Research on the other hand opines that the central bank is likely to keep the policy rate unchanged at 3% for 2018.
“We argued previously that the central bank is not making a firm commitment to normalise interest rates in 2018. Although the probability is there, the risks are not overwhelming and, hence, its relatively dovish tone for now.
“Therefore, we need more conviction before making a firm stand that the OPR may get adjusted next year,” it added.
The research company said the inflation trend may ease in 2018, supported by the high base effect in 2017 and positive sentiment towards the ringgit following the expectation of rising oil prices.
“Sentiment on the ringgit may also remain favourable following Malaysia’s solid Q3 2017 GDP growth which is among the highest in the region. All these mutually reinforcing catalysts for the ringgit may assuage inflation to some extent as importation costs may come down,” PublicInvest Research added.