Bank Negara to raise OPR to 3.5% this year
KUALA LUMPUR, Jan 24: Bank Negara Malaysia (BNM) is expected to raise the overnight policy rate (OPR) modestly by 25 basis points (bp) at the tail end of the second quarter this year, followed by another 25 bps in the third quarter, said HSBC global research Asean economist Lim Su Sian, adding that the current interest rate of 3% is “clearly too low”.
Lim said, most central banks in Asia are quite confident to lift the interest rates up from the current rates that are well below the optimal level, which had partly contributed to the high household debt.
“We have been addicted to the cheap money. If you are a responsible central bank, you must eventually raise the interest rate. You have to call a time out and tell the people that this is not healthy,” the Singapore-based visiting economist told reporters at the HSBC Economic Outlook 2014 media session here yesterday.
If the cost of credit goes up due to an interest rate hike, credit growth will also lose momentum, gradually shrinking household debt, she explained.
Lim, however, said the expected interest rate of 3.5% by year end is appropriate for now, but this is not a “magic number” to combat household debt and national inflation.
Household debt in Malaysia stood above 80% of gross domestic product (GDP), which is ranked among the highest in the region. This may lead BNM to raise the cost of credit, which is now “too cheap” and probably adding to the risk to the financial system, she said.
Malaysia’s consumer price index (CPI) is not at an alarming rate, Lim said, while the BNM “can afford to wait” as it is typically comfortable with the inflation rate of 2-3%. However, she added that price hikes due to government’s fiscal consolidation will push up inflation, testing the comfort range of BNM.
“Our official CPI forecast for now is 2.4%, but we see upward risk to that and it will be reviewed.”
“If we continue to see fuel price hike, it is quite likely that inflation will stay above 3% for most of this year,” she said.
Changes in CPI, sometimes known as headline inflation, are used to assess price changes associated with the cost of living.
On another note, Lim said the Malaysian economy is expected to grow at 5.2% this year, while total exports will rebound to 6.5%.
“2014 could potentially turn out to be a fruitful year for Malaysia,” she said.
The moderate improvement in global economic conditions, be it US, Europe or China, will contribute to the recovery of the exports activities in Malaysia. However, the domestic headwinds will offset the positive impact. “A lot of growth last year in Asia is very domestic-driven, especially Malaysia, but this story is going to shift this year. Even though the external engine has started to rev up, the domestic engine is starting to feel fatigue,” she said.
For instance, the high household debt to GDP showed that household is spending more of their resources to pay off their loans rather than spending more to keep the domestic activities going, she said. Moreover, the government’s fiscal consolidation will also mean less stimulus effect to the domestic economy, she added.
HSBC expects the ringgit to trade at RM3.33 against the US dollar by end of this year, compared to RM3.25 by end of 2013.
Lim said the tapering of quantitative easing by US Federal Reserve will strengthen the US dollar, while the greenback will outstrip any appreciation of Asian currencies. However, a weaker currency does not necessarily reflect poor fundamental, she said.
“Even with the domestic headwinds, we still favour Malaysia for its clearer picture of growth and export recovery,” she said.
source: The Sun Daily
