OPR hike may weigh on corporate, consumer spending

PETALING JAYA: Bank Negara Malaysia's (BNM) decision to raise the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3.25% could further curb corporate and consumer spending amid rising cost of living, resulting in slower economic growth, according to analysts.
The ringgit shot up to a high of 3.8853 today after the rate hike announcement. As at 8pm, it traded at 3.8855 against the greenback.
Head of research at Inter-Pacific Research Sdn Bhd Pong Teng Siew told SunBiz that companies and consumers will have to spend more on loan repayments and have less to spend on investments, discretionary spending as well as consumption items, which will see a moderation in gross domestic product (GDP) growth to some extent. The property sector could also be one of the hardest hit sectors.
He believes larger banks will take the lead by adjusting their base lending rates (BLRs) upwards within a week from BNM's announcement.
“Some banks will react very quickly, perhaps within a day or two,” he said.
Pong said theoretically, the OPR needs to be at around 3.7% in order to return to a positive real interest rate environment given that headline inflation grew 3.7% in 2017. Real interest rates have been in the negative territory for 12 consecutive months.
The central bank increased the OPR for the first time since July 10, 2014 at its Monetary Policy Committee (MPC) meeting yesterday. The last action was to cut it from 3.25% to 3% on July 13, 2016.
With the OPR hike, the floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3% and 3.50% respectively.
Explaining the rationale for the rate hike, BNM said there is a need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time.
The central bank also pointed to a strong growth momentum in 2018, supported by stronger global growth and positive spillovers from the external sector to the domestic economy.
Pong said it is possible for the central bank to raise the OPR by another 25 bps this year, depending on the future levels of inflation and global oil prices.

He highlighted that BNM had repeatedly postponed the interest rate hike, as it viewed the higher level of inflation as transitory and would eventually ease off.
“But this time it was not to be, because the oil price is climbing and the level of inflation is not going to come back down again. I think it (inflation rate) is probably going to be maintained at a very high level for some time to come. And that makes future rate hikes more likely,” he said.
Pong acknowledged that the strengthening of ringgit would likely bring down the inflation rate gradually, but the sustainability of the ringgit rally is uncertain.
Meanwhile, MIDF Research expects no more hikes, as it forecasts GDP growth to remain strong this year, supported by gradual rise in global commodity prices, further market integration, stable labour market and contained inflationary pressure.
It foresees Malaysia’s economy to grow 5.5% in 2018, slower than previous year’s forecasted growth of 5.9%, with inflation falling to 2.6% amid unfavourable base effects.
Separately, CIMB Group CEO Tengku Zafrul Aziz in a statement said the market will be able to absorb the modest 25 bps hike particularly with the stronger Ringgit and the government having a firm grip on inflation.
"We do not expect any further interest rate hikes in the near term, but whatever the macro situation, CIMB is ever ready and well-equipped to help our customers navigate interest rate hikes and other business challenges, whether in Malaysia or in Asean."