Differing views on OPR outlook

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research reiterated its forecast of the central bank maintaining the Overnight Policy Rate (OPR) at 3% on expectations of stronger economic growth and higher inflation.
“As the domestic liquidity situation has eased since the November-December period, we opine that Bank Negara Malaysia (BNM) may only deploy a cut in statutory reserve requirement in the event of any global financial turmoil triggered by adverse external development (namely, European politics),” its economist Sia Ket Ee said in a report last Friday.
Sia said the tone of the Monetary Policy Committee’s (MPC) statement after its meeting last Thursday was broadly neutral, noting the increased optimism on the global economy with positive implications on Malaysia’s exports.
The MPC said the degree of accommodation is consistent with the steady pace of economy activity and stable inflation at the current level of the OPR.
“We take this as a signal that BNM prefers to leave the OPR unchanged so long as the outlook for gross domestic product (GDP) growth and core inflation falls within the official projection range,” he said.
The official GDP growth projection for 2017 is 4-5%.
Sia said BNM’s expectation on growth prospects is broadly in line with HLIB Research’s projection, as it expects GDP growth to be higher at 4.5% in 2017, based on a recovery in the primary sector, strong construction and stable services.
He expects inflation to average at 2.7% this year, on the back of higher fuel prices, sustained food inflation and weaker ringgit.
“However, there is a high possibility of the CPI overshooting 3% in early 2017 due to low base effect of oil price in 2016,” he added, referring to the Consumer Price Index.
Meanwhile, MIDF Research maintained its forecast of one rate cut this year in order to support the domestic economy, particularly on the investment front, to boost employment level should the growth of domestic sector deteriorate.
“This will lead to Malaysia’s benchmark interest rate to 2.75% by year-end 2017. At the same time, we are maintaining our GDP growth forecast of 4.3% and inflation at 2.8% for the year,” it said in its economic review last Friday.
It noted that BNM maintained the OPR last week, as the rebound in global economic conditions have improved the global trade activity and helped to lift Malaysia’s economy. However, BNM also warned that the downside risk to global growth remains, mostly due to the risk of protectionist policies, geopolitical developments and commodity price volatility.
“We opine that between the three, the one risk that has the highest possibility of materialising is on protectionism bias …though the main question is to what extent will he actually increase import tariff to 35% or will he settle at imports substitution? We think that the latter is more likely, which should lead to a slight slowdown in global trade activity,” said MIDF Research.