Tough call but key rate hike likely

Bank Negara Malaysia is expected to announce its second hike in borrowing costs this year, raising the benchmark Overnight Policy Rate (OPR) to 3.25 per cent.


Economists, however, expect it to be a tough call for the central bank's monetary policy committee, which will meet today, in the wake of rising inflation pressures.

The majority of research houses polled expect a 25-basis-point hike (0.25 per cent), while 17.6 per cent do not expect any change.

Quite a number of those polled by Business Times expect the Statutory Reserve Requirement (SRR) to be raised to 4 per cent, the level before the global financial crisis.

Citi expects it to be a close call for BNM and does not expect any more hikes after a 25-basis-point hike today, together with a hike in the SRR by 100 basis points to drain excess liquidity from capital inflows.

Economist Kit Wei Zheng commented that with a 25-basis-point hike so far, real policy rates have turned negative and with the current soft patch in growth, there is a risk of BNM falling behind the curve should growth pick up in the second half.

DBS Bank said there are more downside risks to growth and upside risks to inflation in Malaysia, which can be a dilemma for policymakers.

"It'll be a close call on whether BNM will persevere with its interest rate normalisation or switch its focus to supporting growth."

Growth momentum should re-accelerate in the second half of the year on the back of a gradual recovery in the US and resilient economic outlook in the region.

A real policy rate, that is now negative, is not conducive for longer-term economic stability as it discourages savings and induces speculation in asset markets. This happens when the rate of inflation is greater than the interest rate.

Malaysia's expansionary fiscal policy, with a whole slew of development projects that will boost domestic growth, is already inflationary in nature.

Standard Chartered Bank (Stanchart) expected the central bank to raise the SRR by another one percentage point to 4 per cent.

"This would bring it back to pre-global financial crisis levels and add RM4.5 billion-RM5 billion to SRR held by commercial banks, bringing the total to about RM20 billion."

With a total deposit base of about RM1.18 trillion as of April, Stanchart expects the SRR to be raised beyond the recent historical high of 4 per cent.