Malaysia: Prepare for a rate hike – 6 Jul 2017

  • There is a view emerging that Bank Negara Malaysia will have to raise the benchmark overnight policy rate (OPR) by end-2017 or in early 2018. Earlier in 2017, the market consensus was for no change in the OPR in 2017.
  • The last time the OPR was tweaked was in 2016, when the economy was weaker and policymakers decided on a rate cut of 25 basis points to 3%.
  • The monetary policy committee meets on 13 Jul 17 but the market consensus is for no-change in the OPR, as it would be too soon for the data to show a firmer trend.
  • But Malaysia’s economy has definitely strengthened, growing 5.6% in 1Q17 and there is every indication that the economy will continue to pick up on exports growth and business spending.
  • The prevalent view is that inflation has been cost-push driven, but as private consumption rises, inflation could very well be demand-pull driven.
  • Another factor that will persuade policymakers to look into a rate hike is the weak ringgit, which is still well above MYR4 to USD1 and has contributed to core inflation, which picked up in May 17 to 2.6% y/y, above BNM’s target of 2.3% to 2.5%.
  • The direction that the US Federal Reserve (Fed) takes on further rate hikes as well as the start of the reduction of the US Treasury’s balance sheet used to boost the economy in the aftermath of the global financial crisis will also be factors that will have an influence on Malaysian policymakers.
  • Rate hikes will put more pressure on the MYR.

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