BY Zoe Phoon
News of the country’s escalating inflation rate and resulting (potential) rise in interest rates has put the market on the edge of its seat. The media is alight with commentaries and perspectives as experts scramble to explain, or make sense of, the latest seismic movement in our already volatile economic landscape.
One comment is that while higher oil prices are seen as the catalyst behind the significant spike in inflation in Malaysia, the price of oil has resumed its weakness in international markets, and this should feed through to local price pressures if higher oil prices are indeed the reason behind the stronger price pressures that the local economy is encountering at the moment.
This is according to Jameel Ahmad, vice president of corporate development and market research at FXTM which provides international brokerage services and gives access to the global currency markets.
He said he still stands behind his comments made in late 2016, which was that the acceleration in ringgit weakness since November last year, and its prolonged weakness since, was going to present inflation risks to the Malaysian economy, “which have very well held true as we conclude the opening quarter of 2017”.
It would be a positive if there is no evidence of price pressures spreading more broadly in the economy, as this would somewhat limit the pressure and emerging expectations on Bank Negara Malaysia when it comes to possibly having to raise interest rates higher in line with inflation, he said.
However, as it currently stands, it is important to point out that there are minimal expectations for higher interest rates in Malaysia, regardless of the recent bounce in inflation and the lower borrowing rates are seen as supporting the domestic economy, he noted.
Jameel said there are still a lot of challenges to the global economy that continue to impact sentiment, including prolonged weakness in the price of oil, higher interest rates in the United States and ongoing concerns over the emerging markets entering a period of weaker economic growth.
While growth in Malaysia can still be considered higher than the majority of economies in the developed world, its pace of growth has visibly slowed down in recent times and this has likely contributed in some way to reduced hiring in businesses, he added.
Meanwhile, local market analysts are bracing for a change in the overnight policy rate (OPR). TA Securities Holdings Bhd, recently said that the OPR will likely rise by 25 basis points to 3.25 per cent from the current 3 per cent as a counter measure to inflation and an outcome of negative interest rates. It expects Bank Negara Malaysia (BNM) to make this move before the end of the year.
“We believe that there is a possibility that the central bank may increase its OPR, probably by 25 bps, making it to 3.25 per cent by year end. Supporting our view is improving economic growth, especially due to better performance in the domestic activities and trade, challenged by higher inflation as well as volatile capital flows amid an ongoing US Fed tightening cycle,” the company said in a statement.
The next monetary policy decision by BNM is expected to take place in May 12.
Zoe Phoon is a business and lifestyle writer that can be reached at email@example.com