KUALA LUMPUR: Bank Negara Malaysia’ s repeated reference to the strength of the Malaysian economy in its latest monetary policy statement implies a hike in the Overnight Policy Rate, says the Malaysian Rating Corporation Bhd.
“We believe the increasing trend in the number of such words implies BNM’s overall positive feeling about the economy that could lead to a decision to raise the OPR as early as in the first quarter of 2018,“ said its chief economist Nor Zahidi Alias in a report today.
The increase would mark the first since July 2014.
He said the major factors behind the possible rate hike in the near term include spillover effects from the stronger-than-expected headline growth in 2017.
“For next year, we believe GDP growth will sustain above its long-term trend of 5 per cent, attributed partly by strong trade performance,”he said, adding that it will be line with global trade volume which has been gaining momentum in the past 10 months.
Stable crude oil prices in 2018 would also add to the strength of the Malaysian economy.
Domestic demand resilience is another factor to support economic growth, thanks to the strong private consumption which is likely surpass 7 per cent in 2018.
Nor Zahidi also said the continuing rise in the United States Fed Funds rate and possibly in Europe could lead some capital to flow out from Asia, favouring dollar-denominated assets.
In addition, further improvements in wages and a stable labour market as well as the increasing strength in consumer spending may prevent inflation from moderating substantially in the near term.
“Against such a backdrop and improving consumer sentiment, higher interest rates in the domestic economy will, to some extent, prevent significant outflows of capital from Malaysian shores in 2018 and keep inflation in check,” he said, adding that it will also have a positive impact on the ringgit.
On the impact of the possible OPR hike on the household balance sheet, he said will not lead to a deterioration in the household’s debt servicing capacity.
“We are of the view that BNM has been managing household debt cautiously so as to not affect the economy, especially private consumption.”