Bank Negara ups OPR for the first time since 2011

Interest rates are set to rise with Bank Negara having raised the benchmark overnight policy rate (OPR) by 25 basis points (bps), or 0.25%, to 3.25% as part of measures to curb rising household debt.

The hike was within most economists’ expectations after the broad hints given in the last monetary policy statement in May, in which policymakers had expressed concerns over the continued build-up of financial imbalances.

Bank Negara policymakers explained in a statement that the adjustment to the OPR was made amid firm growth prospects and with inflation remaining above its long-run average.

“This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy. At the new level of the OPR, the stance of monetary policy remains supportive of the economy,” they said.

This would be the first time since May 2011 that the central bank has raised the OPR. A rate hike would have an impact on businesses and consumers, as changes in the OPR would be passed on through changes in the base lending rate.The economy grew by 6.2% year-on-year in the first quarter, with private consumption up 7.1% and private investment expanding by 14.1%. Inflation stood at 3.2% in May, moderating from 3.4% in April. However, the prolonged period of low interest rates had resulted in household debt rising to 86.8% of gross domestic product at the end of last year.

Alliance Research chief economist Manokaran Mottain said this would be the only hike for the year.

“Another 25-bps hike will crimp domestic demand,” he told StarBiz, adding that there were other measures that could be taken if household debt continued to grow at a worrying pace.

Manokaran said given the wide ranging impact on the economy from another rate hike, policymakers would opt for a hike in the statutory reserve requirement (SRR), which has stood at 4% since July 2011.

The SRR is the amount of funds that commercial banks are required to keep with the central bank, interest-free, and is an instrument to manage liquidity, while the OPR is essentially the rate in which banks lend to each other.

Manokaran believes that any further rate hikes would only come in the first-half of next year and would depend on the effectiveness of the current rate hike and other macroprudential measures.

“We can expect more macroprudential measures together with Budget 2015,” he said.

Meanwhile, CIMB Investment Bank Bhd economist Julia Goh, who had expected a hike only in September, said the central bank would not adopt a hawkish stance because higher interest rates would impact consumers in the lower-income brackets the most.

“The hike shows that policymakers are still confident of domestic demand, that’s why they had the leeway to raise the OPR,” she said.

Goh, like several other economists, had turned more cautious on a July hike in recent weeks.

Their views were further reinforced by the US Federal Reserve assurance that interest rates would continue to be low despite the tapering of the bond-buying programme, a cut in the eurozone’s key policy rate, and the Bank of Japan’s quantitative easing measures.

Franklin Templeton GSC Asset Management’s executive director and Malaysian head of fixed income and sukuk Hanifah Hashim said the hike was the right move because compared with an inflation rate of 3.2%, an OPR of 3% meant that investors were experiencing a negative carry.

“As such, the OPR needs to be adjusted to provide a positive or neutral carry to investors to encourage savings,” she said.

Hanifah said the hike would also put the country in a fundamentally stronger economic position.