KUALA LUMPUR: The big question on everyone’s mind as the Monetary Policy Committee (MPC) meets today will be whether the central bank will raise the overnight policy rate (OPR) again, which Kenanga Research says is “highly likely” to happen.

Kenanga Research economist Wan Suhaimie Wan Mohd Saidie said this is based on the historical trend of Bank Negara Malaysia’s (BNM) rate hike decisions.

“Since the central bank had decided in July to raise the OPR, the probability of them repeating the same decision is highly likely in the next meeting.

“According to historical trend of past OPR increases, each time the interest rate is raised, it is raised again by 25 basis points (bps) in a short period of time — usually within the next six months — in order for the policy to make an impact,” Wan Suhaimie told The Edge Financial Daily.

Prior to the last MPC meeting, the research house thought BNM was unlikely to raise the key interest rate as it believed the economy would grow at a slower pace in the second half of 2014 (2H14), which would adversely impact domestic spending. Additionally, the inflationary trend is largely influenced by cost-push factors.

“[However] since BNM has already started the ball rolling, we think it has to add at least another 25bps soon to make an impact,” said Wan Suhaimie.

He believes BNM may want to be a step “ahead of the curve” in response to any possible US Federal Reserve interest rate hike that may be announced on the completion of the Federal Open Market Committee meeting yesterday.

Chris Eng, head of research at Etiqa Insurance & Takaful, concurs with Kenanga Research that an OPR raise may be imminent despite slowing production growth and export numbers in July.

Malaysia’s Industry Production Index (IPI) had tumbled to 0.5% year-on-year (y-o-y) in July compared with 7% in June, in tandem with poor export performance, which fell to 0.6% y-o-y in July against the first half of the year’s export average of 12.6%.

“By raising the key interest rate now, there will be lack of uncertainty as to when the next rate hike will occur, as the expectation is such that BNM will be unlikely to raise the OPR until the goods and services tax (GST) has been implemented.

“BNM does not like uncertainty and has always tried to be forward looking and been good in giving the necessary guidance,” Eng said in a telephone interview.

But M&A Securities Sdn Bhd expects the OPR to remain unchanged until the end of 2014. It expects it to be raised early next year to 3.50%.

M&A head of research Rosnani Rasul said BNM “can wait before hiking rates up again”, given that the economy is already responding to some of the macro and macro-prudential measures instituted since 2010.

“With data on exports and IPI showing much weaker-than-expected readings for July, the consensus now expects OPR to stay unchanged at least until the next meeting, scheduled to be in November. We could be risking these indicators’ performance should policy rate get tightened further,” she said in a note yesterday.

PublicInvest Research agrees it is “too soon” now to raise the OPR again but said there is a strong likelihood it will be raised by another 25bps in the next six months “if domestic economic growth continues its momentum, before the GST kicks in”.

Should there be a rate hike decision at the MPC meeting today, an analyst with the research house said the property sector will face a temporary setback.

“It will also indicate that Bank Negara thinks that the domestic economy is robust enough to weather this hike,” he noted.


This article first appeared in The Edge Financial Daily, on Sept 18, 2014.