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Wednesday, 11 July 2018

(The Star) Bank Negara expected to hold interest rate as it keeps an eye on growth

PETALING JAYA: Bank Negara is likely to maintain the overnight policy rate (OPR) steady at the current 3.25% level despite threats of a trade war and government spending cuts that threaten to ease economic growth, said economists.

They said the central bank would likely prioritise supporting economic growth locally despite the rising rate environment in the United States, and that this focus is likely to be supported by moderating inflation expectations.

The inflation outlook is turning benign after the goods and services tax (GST) was abolished after Pakatan Harapan came into power.

The lid on the rate of inflation would also be kept after retail pump petrol prices remain unchanged.

Bank Negara’s monetary policy committee is set to meet later today to decide on the country’s OPR level.

“I believe the central bank will keep rates steady. It needs to do this amid trade tensions, market volatility risks and the domestic scene, which is seeing a transition in political and policy-making,” Socio-Economic Research Centre (SERC) executive director Lee Heng Guie told StarBiz yesterday.

“I don’t think Bank Negara will tinker with the interest rate even though inflation is trending lower.

At this interest rate level, the economy is still growing, although the investment side is a bit softer while private consumption is still fairly resilient. I think interest rates will remain at the present levels for the rest of the year,” Lee said.

Alliance Bank Malaysia Bhd chief economist Manokaran Mottain said that he is anticipating status quo in terms of interest rates.

“I believe the current focus is for economic growth and there are no additional conditions that would cause them to revise this, as there is no catalyst for a revision of interest rates,” Manokaran told StarBiz.

He said the concern for outflows due to the rate hikes or potential rate hikes in the US is an issue that all countries are facing and is not particular only to Malaysia.

“There is no point in fighting these outflows with our local interest rate policy because we cannot be immune to this issue since it affects every country in the world.

“You see, despite all the foreign (hot money) outflows, our currency is still resilient. So, our local interest rate is expected to be sustained at present levels,” Manokaran said.

He noted that the inflation environment presently was not too low and was coming down from a relatively high base before. Thus, the present interest rates are still suitable for the current inflation environment.

In its quarterly report, SERC said it expects inflation numbers to stay low for some time.

The inflation rate, according to the consumer price index, was at 1.8% in May that is a reflection of the largely technical impact of the high base effect on stabilising fuel prices.

SERC expects inflation to rise by 1%-2% from 2%-3% previously and the research centre expects Budget 2019 to introduce more initiatives to keep prices of staple foods stable.

Meanwhile, the ringgit, which has surrendered most of its gains against the US dollar in the year-to-date (YTD) period, is now a victim of the rising rate environment in the US that is causing hot money outflows.

Lee, however, highlighted that on a YTD basis, the ringgit is still higher by about 0.6% against the dollar, indicating resilience in the local currency.

“I think there is no need to purposely defend the ringgit with monetary policy (at this point), as it is a reflection of capital flows. I think we can tolerate a weaker ringgit in line with other regional currencies,” Lee said.

“Bear in mind that while there is expectations for the Federal Reserve (Fed) to raise rates now, if trade tensions spill over and affect the US economy, the dynamics will change again.

“This might cause the Fed to relook at the pace of rate hikes, moving forward,” he added.

The ringgit last traded at 4.022 to the US dollar and has been on a general weakening trend since April.

AmBank Group’s chief economist Anthony Dass said in a report in late May that he believes the potential inflationary pressure from the cost side would remain subdued due to the absence of the GST, fuel subsidy and a firmer ringgit.

This will allow Bank Negara to maintain the OPR at current levels this year.

“However, liquidity remains healthy, suggesting that the demand pull inflation remains.

“Thus, we reiterate our 45% chance of a rate hike in September,” Dass said in his report.