Bank Negara seen raising interest rate in 2H2014

by **Cals** Fri 08 Nov 2013, 13:41

Business & Markets 2013

Written by Chong Jin Hun of theedgemalaysia.com

Friday, 08 November 2013 11:13

KUALA LUMPUR (Nov 8): Bank Negara Malaysia (BNM) may raise interest rates by the second half of 2014 (2H14), according to AmResearch Sdn Bhd. This is in anticipation of higher inflation which will create a negative real interest rate environment in the country.

In a note today, AmResearch economist Patricia Oh Swee Ling said the firm expects BNM to raise the overnight policy rate (OPR) by 25 basis points or 0.25%.

"Despite the rising cost pressure, Malaysia is likely to maintain a positive real interest rate environment during 1H14. Headline inflation will probably stay below 3.0% throughout 1H14.

"Nevertheless, further subsidy cuts and higher petrol pump prices in 2H14 will push inflation above 3.0%. As such, we envisage interest rate to increase by 25 bps in 2H14 should inflation stay elevated above 3.0% for an extended period," Oh said.

She said a prolonged period of negative real interest rate does not augur well for the broader economy.

BNM had its monetary policy committee (MPC) meeting yesterday, maintained the OPR at 3.00%

The central bank said it foresees uncertainties in the balance of risks surrounding the outlook for domestic growth and inflation.

"The MPC will continue to carefully assess the global and domestic economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy," BNM said.

For comparison, Alliance Research Sdn Bhd economist Manokaran Mottain said the firm expects BNM to maintain the OPR at 3% till the first quarter of 2014.

This is based on Alliance's view that inflation, as measured by the consumer price index, will stay below 2.5% in 2013, Manokaran said in a note today.

"We maintain our view that inflation would remain under control below 2.5% in 2013, thus fixing a steady OPR at 3% for the rest of the year and into 1Q14.

"In the near term, we expect prices to move upwards further, impacted by the Budget policy reforms as well as the anticipated second round subsidy rationalisation on fuel, which we expect to be implemented between the next three to six months," he said.