Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on November 10, 2017

KUALA LUMPUR: In its final meeting this year, Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) kept the overnight policy rate (OPR) unchanged at 3% yesterday, an outcome that was widely expected.

However, the MPC’s statement yesterday also indicated the possibility of a rate hike in 2018 should the Malaysian economy continue to grow, with further increases in inflation.

“Given the strength of the global and domestic macroeconomic conditions, the MPC may consider reviewing the current degree of monetary accommodation. This is to ensure the sustainability of the growth prospects of the Malaysian economy,” the statement read.

When contacted, Malaysian Institute of Economic Research senior research fellow Dr Zulkiply Omar told The Edge Financial Daily that if recovery in global trade continues at the current momentum, a rate hike is “understandable” to control inflationary pressure.

“The recent increases in CPI (consumer price index) were driven by oil prices, but the other components in the index also showed signs of strong recovery in external demand, so a rate hike is possible next year,” he said over the phone.

The MPC said headline inflation for 2017 as a whole is expected to be at the “upper end of the forecast range”, after noting that headline inflation increased to 4.3% in September, arising from higher global prices of refined oil caused by disruptions in the global supply.

It had previously projected that headline inflation would increase in 2017 to between 3% and 4%, and that the country’s economic growth this year would be between 5.2% and 5.7%, and between 5% and 5.5% next year.

Moving into 2018, MPC said the headline inflation is projected to moderate on expectations of a smaller effect from global cost factors. Nevertheless, it added that the trend of headline inflation will be dependent on future global oil prices which remain highly uncertain.

In her research note yesterday, United Overseas Bank (M) Bhd economist Julia Goh said MPC’s statement suggested a possible increase in OPR next year amid robust growth prospects and her team is pencilling in a 25 basis points (bps) increase. “More likely to be in the second quarter of 2018 or later. In general, this is in line with our view on rates normalising in the region,” she said.

RHB Research’s economists shared a similar view in their report yesterday, saying that the monetary policy stance is tilted toward the upside in 2018.

“We believe the central bank would likely increase OPR by 25bps to 3.25% next year, as major global central banks are increasingly inclined to tighten monetary policies and the Malaysian economic growth is projected to improve further,” they said. However, they did not specify when the rate hike is expected to materialise.

Barclays plc senior economist Rahul Bajoria thinks it will likely happen in the first quarter of next year, according to Bloomberg.

“The central bank has taken cognisance of the strong domestic growth and has clearly indicated it can consider adjusting monetary conditions in coming months. We have a rate hike pencilled in for the first quarter of 2018,” Rahul said in Singapore.

Nomura Research, meanwhile, noted that the central bank sounded more confident about the growth outlook this time than in its September statement, but continued to downplay the recent pickup in headline inflation.

“While our base case had been for BNM to leave its policy rate unchanged through the rest of this year and 2018, we have noted that if financial-imbalance risks continued to build, the probability of rate hikes could rise as BNM seeks to eventually, but gradually, normalise policy from an accommodative stance,” it said in a note yesterday.


 

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