Bank Negara Malaysia (BNM) may raise rates for the third time in five months after strong economic growth in the first half, but it could be a close call, with many analysts believing it will keep rates on hold due to fears of a global slowdown.
Nine out of 16 analysts polled by Reuters expect a rate hike of 25 basis points (bps) to 2.75% at a policy review today, while the remaining seven expect a pause.
Most of the economists who expect a hike do not see any more tightening for the rest of the year.
Of those who see no changes in rates today, two said the central bank was already finished with tightening for the year, while three predicted it would bump up rates in September.
Malaysia last month raised its full-year economic growth forecast to 6% from 4.5%-5.5% after gross domestic product (GDP) expanded by 10.1% in the first quarter (1Q) from a year earlier, its fastest pace in 10 years.
Export growth in April and May, however, has moderated compared to 1Q numbers and this may impact 2Q economic growth. The central bank has said that domestic factors would drive policy considerations.
Uncertainties over the eurozone recovery and fears the US economy may be losing steam may also influence BNM’s decision, with some economists saying that weak US economic data recently has lessened the chance of a domestic rate rise.
Late last month, the BNM governor said inflation was not a concern.
July hike, last of the year?
After two 25bps rate hikes in March and May, Bank Negara will decide if it should further nudge rates to a more “normal” setting.
Economists consider that 2.75% would be the normal rate for BNM, while remaining accommodative to further growth, giving policymakers the opportunity to pause for the rest of the year to review the impact of the earlier tightening.
The central bank cut rates by a total of 150bps during the global financial crisis, from 3.5% to 2%.
Domestic demand may remain firm as imports of consumption goods have been strong. In contrast, export growth has moderated, but some easing had been expected going into the second half.
Bank Negara has also downplayed any fallout from the eurozone debt crisis, although investors will watch its references to the global economic situation for clues on whether rate hikes have ended for now, or if they will continue.
Probability: More likely
Market impact: Both the ringgit and bond markets stand to gain from another rate hike as foreign investors would continue buying into government bonds, betting on more ringgit gains.
In June alone, five-year government bond yields dropped 7bps while the ringgit appreciated by 1.2%. The ringgit has gained more than 6% year-to-date, making it the best performing Asian currency.
Rate pause in July, but to continue later?
Growing uncertainty about the global economic recovery may lead to more moderate economic growth, prompting the central bank to pause its tightening campaign at the current 2.5% before hiking rates once more in 4Q.
Bond and forex traders say the sharply divided outlook for today’s decision is due to the markets’ inability to gauge what the central bank considers to be an acceptable level.
The Overnight Policy Rate (OPR) has a relatively short history, making it difficult to determine what is considered a normal level. It was only introduced in 2004, with an initial setting of 2.7%.
Three-month Klibor was quoted at 2.73% on Tuesday. In the forward starting swaps space, the three-month rates swap on a contract starting after three months was quoted at 2.8%.
This implies the market is pricing in just 7bps of rate tightening by October. The Klibor in recent weeks has increased 6bps since the May rate hike, compared to a 37bps gain before the May rate hike, implying that there is less anticipation for a hike today.
Probability: Less likely
Market impact: A pause would not be a big cause for concern as foreign investors are still buying ringgit and government bonds as Asian currencies track yuan gains after China abandoned its two-year currency peg to the US dollar. — Reuters
This article appeared in The Edge Financial Daily, July 8, 2010.
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