WEAKER H2: Bank Negara meeting on Sept 18 likely to keep OPR at 3.25pc, says HLIB
THE odds that Bank Negara Malaysia (BNM) will raise interest rates next week to add to its 25 basis point (bps) hike in July have been trimmed, given the recent developments locally and abroad.
While many still believe that another increase is imminent, analysts at Hong Leong Investment Bank Bhd (HLIB) said Bank Negara may keep its benchmark Overnight Policy Rate (OPR) at 3.25 per cent after its monetary policy committee (MPC) convenes on September 18.
HLIB noted that the strong first half gross domestic product (GDP) growth of 6.3 per cent now appears unsustainable in the second half.
Recent data, including Industrial Production Index (IPI), export and loan growths, and Purchasing Managers Index, point to a more moderate expansion ahead, it added.
IPI growth tumbled to a 17-month low of 0.5 per cent year-on-year in July, worse than the median estimate of a 4.3 per cent year-on-year gain and underperformed most regional countries.
The lower-than-expected IPI and export growth in July marked a weak start for the third quarter GDP, lending support to HLIB’s view that growth could taper off in the second half to 5.6 per cent.
Following this, the firm believes Bank Negara may turn its attention to the downside risk to growth, instead of upside risk to inflation.
“We now expect Bank Negara to stay pat in the upcoming MPC meeting on September 18. We see no rush to raise the OPR to 3.5 per cent, given a not-so-favourable macroeconomic outlook on the absence of demand-driven inflation,” HLIB said yesterday.
Bank Negara raised the OPR by 25 bps to 3.25 per cent in July in response to firm growth prospects. This was the first rise since May 2011 and the reasons, although not mentioned, were broadly hinted towards containing inflation and curbing rising household debt.
But OCBC Bank economist Wellian Wiranto still expects Bank Negara to raise OPR once more, bringing it to the “old normal” rate of 3.5 per cent till the end of 2015.
“Our recent meeting with the central bank suggests that it remains comfortable with growth, but relatively less so on financial imbalance risks,” Wiranto said.
Another hike, he argued, would provide it the grounds to say that any inflation pick-up next year is transitory.
Malaysia’s economy is on the roll, Wiranto said, placing it as the third-fastest economy after China and the Philippines.
Bank Negara’s growth outlook remains constructive enough to suggest that there is enough comfort zone for further rate hikes, he added.
Meanwhile, a local economist said it is very likely for a hike despite the expected moderate growth in the second half.
“To say that the GDP growth is not sustainable in the second half of the year is quite harsh, but I would say that the rate would be much slower,” said Dr Mahyudin Ahmad, a senior lecturer of University Teknologi Mara’s Business and Management Faculty.
“We will still record growth, but it may be much slower than the first half. I believe it is still likely that the central bank would proceed with increasing the OPR when it holds the next meeting,” he told Business Times yesterday.