KUALA LUMPUR (March 28): The stronger-than-expected inflationary pressure — based on the consumer price index (CPI) that has climbed at the fastest pace in eight years at 4.5% — raises the likelihood of a hike in overnight policy rate (OPR) by Bank Negara Malaysia (BNM).
BNM may raise its OPR by 25 basis points (bps) to 3.25% by year end from the current 3% as inflation expectation implies negative real interest rates, TA Securities wrote in a research report yesterday.
TA Securities forecasts March CPI may rise 5.1% from a year earlier on low base effect amid cost-push factors.
In the note, TA Securities said its view also took into account Malaysia’s improved economic growth outlook and volatile capital movement in anticipation of US interest rate hikes.
“The latest BNM’s inflation projection range of 3% to 4% implies that real policy rate (OPR) will be negative, which could prompt a tightening bias in the monetary policy. In the last MPC (monetary policy committee) meeting, BNM held its policy rate steady at 3%.
“As such, we believe that there is a possibility that the central bank may increase its OPR, probably by 25bps, making it 3.25% 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 (US Federel Reserve) tightening cycle,” TA Securities said.
Apart from the low base effect, TA Securities noted that cost-push factors will continue to dominate, mainly from the transport cost category. “We also opine that food prices will remain high in the coming months especially with the upward adjustments in retail cooking oil price and increase seen in global commodity prices,” it added.
BNM will announce its next monetary policy decision on May 12.
Citi Research does not rule out the possibility of an interest rate hike by BNM too.
“With real interest rates likely [to be] more negative than expected, we tentatively pencil in a 25bps hike on Nov 17, but acknowledge significant uncertainties around the precise timing and likelihood of this call,” said Citi Research economist Wei Zheng Kit in a note.
“The recent change to update oil prices on a weekly basis from April 1 [versus monthly currently] would allow for the quicker transmission of oil price movements into transport CPI, which may in turn allow for the soothing of subsequent pump price volatility.
“We would keep an eye on the May MPC statement for changes in the assessment on demand pull and core inflation — a more hawkish tilt on those fronts could signal a hike as early as July,” he added.
Nonetheless, Second Finance Minister Datuk Johari Abdul Ghani yesterday said he did not expect inflationary pressure to build up. He said the headline inflation is expected to ease amid the softening of crude oil prices.
“Now if you look at oil price [it] has come down a bit. I think you will see that [the CPI will] record some slight adjustment over time. Nevertheless I think we also need to manage [inflation],” he said.
“What triggered the [spike in February’s] inflation is actually the cost of crude oil, which has increased from US$30 (RM132.30) to US$55 [per barrel]. That is the cause. If you look at transportation costs, in the basket of CPI, that represents almost 13% to 14%.
“But if you take that out, the rest of core inflation [growth] remained the same, at about 2.2%, 2.3%,” said the minister.
Malaysian Rating Corp Bhd (MARC) is of the view that the monetary policy space remains rather limited despite the fact that Malaysia’s OPR has only been reduced once since July 2016. At the current level of 3%, real interest rates are approaching 0% or negative as inflation is set to pick up in 2017. Past experiences suggest that the policy rate is normally adjusted to ensure positive real returns for savers. However, this time around, MARC does not anticipate BNM to adjust the OPR upward as it may lead to negative ramification for headline growth especially at a time when the economy is expected to register a below-trend growth. At the same time, lowering the OPR would risk the economy experiencing another round of capital outflows and weaken the ringgit further at this juncture.
Meanwhile, CIMB Research, which has raised its inflation forecast from 2.8% to 3.5%, does not see the likelihood of an interest rate hike on the horizon.
It said BNM will tolerate inflation at levels below 4%, as drivers are mainly cost-induced. “OPR outlook unchanged at 3% in 2017,” it added.
This article first appeared in The Edge Financial Daily, on March 28, 2017.