Some called it wrong, some called it right, but inflation concerns persist and many wonder how long the overnight policy rate can remain unchanged.
Although Bank Negara Malaysia (BNM) decision to retain an OPR of 3% last week produced an audible sigh of relief among those who have already had to weather a harsh loan environment, many finance experts predict that the central bank will ultimately have to deal with rising inflation – which BNM itself projected to be 4% to 5%.
Earlier, a number of market analyst projected that the OPR would rise by another 25 basis points before the end of the year. Among them, TA Securities Holdings Bhd said interest rates would likely rise by the end of the year with the OPR rising to 3.25%.
TA Securities said this may become a necessity given the 4% inflation projection might lead to an outcome of negative interest rates if the OPR remains at the current rate.
However, UOB Malaysia, which predicted correctly that BNM would not raise the OPR, believes that a possible rate hike in the future would depend on the state of domestic demand.
Its senior vice president of global economics and markets research Julia Goh said if BNM sees stronger domestic demand and sustained inflationary pressures, then it may consider raising rates. But that does not seem to be the case at the moment.
Goh said domestic demand is still resilient, but it is showing signs of moderation, partly because BNM is projecting unemployment rate this year to be above 3.5%.
She added that another trigger for a potential rate hike is the risk of a financial imbalance, but that seems to be abated because household debt growth slowed down to 5.4% last year, or 88.4% of gross domestic product.
In 2015 it expanded by 7.3% and 2010, it hit 14.2%.
Goh also pointed out that it would be highly unlikely for the central bank to cut the OPR in the foreseeable future.
At its meeting last Friday, the Monetary Policy Committee of BNM decided to maintain the current OPR, adopting a cautiously optimistic outlook as the global economy continues to expand.
It said industrial activity and global trade have picked up and growth is becoming more synchronised across the advanced and emerging economies. Indicators suggest that the outlook for the global economy will continue to improve.
In the advanced economies, BNM said the revival in investment is expected to provide additional impetus to economic activity, while in emerging economies, growth is projected to be supported by sustained domestic activity and stronger external demand.
It acknowledged that certain risks to global growth remain, such as protectionism, geopolitical developments, and commodity price volatility. These risks could also reignite financial market volatility.
In Malaysia, BNM said the growth momentum since the second half of 2016 is expected to strengthen in the first quarter of 2017, and to be sustained for the rest of the year. Growth will be mainly driven by domestic demand amid continued wage and employment growth, and the implementation of new and on-going investment projects.
On the external front, given the improvement in global growth, exports are expected to perform more strongly and contribute positively to Malaysia’s economic performance.
Also, the ringgit has continued to stabilise and banking system liquidity remains sufficient. Financial institutions continue to operate with strong capital and liquidity buffers and the growth of financing to the private sector is consistent with the pace of economic activity.
“At the current level of the OPR, the stance of monetary policy is accommodative and supportive of economic activity. The MPC will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation,” BNM said.