News: Interest Rates Expected to Take a Hike in January 2018

Nov 14, 2017

Home buyers and mortgage loan borrowers are advised to save more money to repay their loan instalments as Bank Negara Malaysia (BNM) is expected to raise its Overnight Policy Rate (OPR) as early as January.

This is because the central bank’s latest forward guidance showed a ‘hawkish shift’ and there is a high possibility it will increase the lending rate when it releases its monetary policy statement on 19 January 2018.

According to DBS Bank the forward guidance indicates a likelihood of a policy move as early as next January, but it would mainly depend on inflation readings over the next two months.

“Consideration must also be given to the upcoming election. BNM also has more than just the OPR in its policy tool bag. It could also raise the Statutory Reserve Requirement Ratio (SRR) before executing a rate hike per se,” it noted.

Previously, the central bank first slashed the SRR by 50 basis points (bps) to 3.50 percent in February before officially lowering the OPR by 25 bps in July.

As such, DBS Bank thinks that the SRR would be hiked by 50 bps before two rate increases of 25 bps each in Q3 and Q4 2018, which will enable the OPR to reach 3.5 percent by the end of next year.

Moreover, AffinHwang Capital Research revealed that the goal of the rate hike is to prevent the growth of the gross domestic product (GDP) from surpassing an optimum level that would lead to higher inflation.

“We are maintaining our view that BNM will likely increase its OPR by 25 bps to 3.25 percent in Q2 2018, on expectations that the current strong economic momentum continues on a favourable global economic environment.”

But it feels that the magnitude of increase would be gradual and depend on macro growth and the Consumer Price Index (CPI), as well as developments in US monetary policy, movement of Federal Reserve’s funds’ rate and reduction in the latter’s balance sheet.

Meanwhile, BMI Research expects a hike of a quarter basis point in 2018 due to improving economic prospects and to pre-empt rising inflation. BNM could also increase its interest rates if GDP growth becomes stronger than projected and if inflation remains high.

“The risks to our interest rate view are firmly to the upside. A more aggressive rate hiking cycle by the US Fed could see BNM hike rates to prevent the currency from selling off excessively as a result of capital outflows.”

Similarly, AmBank is forecasting a hike of 25 to 50 bps next year, as the central bank’s tone echoes the hawkish sentiment of South Korea’s and that in the Philippines.


Image sourced from BNM.


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