Overnight Policy Rate expected to stay at 3.25%, GDP growth to top 4% this year


Overnight Policy Rate  expected to stay at 3.25%, GDP growth to top 4% this year

PETALING JAYA, 22 Feb: Economists opined that Bank Negara Malaysia is likely to keep the overnight policy rate (OPR) at the current 3.25% considering that the Malaysian economy will continue to grow by at least 4% this year.

Hong Leong Investment Bank (HLIB) Research economist Sia Ket Ee said in a report last Friday that the pace of gross domestic product (GDP) growth slowdown still does not warrant an imminent OPR cut despite a more moderate growth outlook and the absence of an inflation threat.

“We expect Bank Negara to wait patiently for fiscal measures to take effect (Employees Provident Fund contribution rate cut effective only in March) before assessing the need to lower the OPR,” he said.

Having said that, Sia is of the view that a policy loosening may become necessary should GDP growth falter below the 4% level.

Sia is maintaining 2016 full-year GDP growth forecast at 4.2%, saying the recent budget recalibration is expected to result in a minor dent in growth due to spending cuts in supplies and services of about RM2 billion.

“Meanwhile, measures to boost disposable income (cut in EPF contribution rate and tax relief) are expected to lend support to private consumption growth,” he said.

HSBC Global Research economist Lim Su Sian also does not foresee any changes to the OPR this year.

“Note that since Bank Negara cut the statutory reserve ratio by 50 basis points to 3.50% on Jan 21, liquidity conditions appear to be gradually easing. Three-month KL Interbank Offered Rate now stands at 3.75%, about seven basis points lower since the decision,” she said.

AmResearch economist Patricia Oh Swee Ling said slower loan growth and M3 money supply suggest moderate economic expansion ahead, with 2016 GDP growth projected at 4.6%.

“High levels of household indebtedness and the recent rise in impairments are key challenges for the domestic economy,” she added.

Oh expects the current account to remain in surplus in 2016. However, as a ratio to GDP, the current account surplus will probably slow to 1.5% in 2016 as healthy net trade is offset by outflows in the services and income accounts.

Malaysia’s current account surplus surged to RM11.4 billion in Q4 2015, the highest in six quarters. It stood at 2.9% of GDP in 2015, compared with 4.3% in 2014.

Although exports posted healthy growth in 2015 due to the weak ringgit, Oh opined the growth is unlikely to be sustained given the weaker-than-expected global demand and lacklustre crude oil prices.

MIDF Research sees Malaysian economic growth slowing to 4.4% this year due to the weakness in the global economy, with the first quarter growing by 4.2%. The domestic economy is likely to be affected, particularly employment and income levels. It said investment activity is likely to continue growing at a moderate level as the global economy is yet to show any signs of recovery.

HLIB Research’s Sia expects inflation to average 2.5% in 2016, assuming crude oil at US$30 a barrel and an average retail price of RM1.75 per litre for RON95.

As for the ringgit, FXTM chief market analyst Jameel Ahmad expects the slightly stronger than expected economic data to continue improving sentiment towards the currency over the longer term.
Sia, meanwhile, has maintained the ringgit year-end forecast at RM3.80-RM4.00 to the dollar.

“Macro risks surrounding oil price slump are diminishing after the budget recalibration. Coupled with the dovish Federal Open Market Committee statement and preference of People’s Bank of China for a stable yuan, we expect a more appealing case of ringgit appreciation, particularly towards the second half of the year,” he added.

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