Bank Negara OPR action as early as March?
PETALING JAYA (Jan 31, 2014): Analyst are expecting Bank Negara Malaysia (BNM), which predictably left the overnight policy rate (OPR) unchanged at 3% for the 33rd consecutive month, to cut or increase the benchmark interest rate by more than 25 basis points (bps) as early as March this year.
MIDF Research predicts a more than 26bps hike in the OPR as inflation continues to creep up as the government pushes on its subsidy rationalization to reduce its deficit.
As such, MIDF said a 25 basis points points (bps) hike in OPR may not be sufficient.
“We continue to expect Bank Negara Malaysia (BNM) to hike up by 25 bps in the second quarter of 2014 and another in late third quarter or early fourth quarter of 2014," it said.
MIDF does not believe that inflation can be contained in the absence of a rate hike.
“We think that the second round effects of the adjustment in prices of those administered items is working on its way to the broader economy. The continued month-to-month rise in the Consumer Price Index (CPI) is an indication that the one-off cost push effect may not have died away as instantly as it should,” it said.
“Businesses may have foreseen structurally, the economy will face much higher prices of inputs going forward amidst sustained strong domestic demand. That may lead to rising inflation expectations,” it added.
Overall, MIDF took the statement by the Monetary Policy Committee (MPC) on Wednesday as giving guidance of possible hikes in OPR in subsequent meetings.
“The combination factor of improving growth performance, narrowing real interest rate (Malaysia is the very few emerging market countries with negative real interest rates), rising inflation and inflation expectations, persistently high household debt, and the likely further capital outflows would all culminate to signal that the risk of faster inflation would outweigh the risk of growth slowdown,” it said.
Meanwhile, BIMB Securities Research Sdn Bhd said higher cost pressure for an extended period coupled with strong demand could trigger an interest rate hike in 2014.
“We expect benchmark interest rate to remain unchanged in the first half of 2014 although prices have picked up considerably,” said its head of research Kenny Yee, which noted that Malaysia’s headline inflation breached 3% in December 2013.
“The key is the trend in core CPI (excluding food) which we think is a critical factor in determining the official rate,” Yee said.
“Based on a slew of increases in food, petrol, electricity and other goods and services, we think that there is a high possibility of a rate hike by 25 bps in 2014 as the BNM positions itself to be ahead of the curve to avert an excessive price increase following some of measures to be undertaken by the government to reduce the burden on its coffers,” he concluded.
Meanwhile, Maybank IB Research is sticking to its OPR call despite the rising inflation.
“We expect OPR to stay at 3% in 2014 despite rising inflation which is “cost-push” following the hikes in the prices of fuel (diesel, petrol), energy (gas, electricity) and the abolition of sugar subsidies with the resumption of subsidy rationalisation since Sep 2013,” it said.
However, it does expect inflation rate to rise to more than 3.5% this year from 2.1% in 2013.
The firm said it sees little evidence and risk of “domestic pull” inflation in the economy amid the slump in consumer confidence, falling capacity utilisation, small output gap and the prospect of lower real wage over income growth.
In addition, it opined that the expected continuation of current monetary policy stance was to support domestic growth amid the fiscal tightening.
BNP Paribas held a contrarian call, alluding to a potential cut in the OPR, explaining that the MPC made pains to stress inflation was cost-push as a result of the cut in subsidies and that demand pressure remained contained, showing that an an impetus for policy tightening beyond significant balance of payments strain seems limited.
It said that a heightened sensitivity to growth risk may prompt easing on the OPR as the country's gross domestic product was likely soften to 4% in the fourth quarter of 2013 from the 5% seen in the third quarter.
"Though hardly a smoking gun, the likely “sticker-shock” the headline reading, BNM’s sanguine tone on inflation and official estimates of trend growth being 5%-5.5%, hint a 25 basis points policy rate cut to cushion against fiscal
tightening and downside risks to growth could be implemented as soon as March, assuming the government does not hike fuel prices," it said.