MARC expects Bank Negara to raise rates by 25-50bps this year

PETALING JAYA: Malaysian Rating Corp Bhd (MARC), which expects Malaysia’s real gross domestic product (GDP) to expand by 5.3% in 2018, anticipates Bank Negara Malaysia (BNM) will raise the Overnight Policy Rate (OPR) by 25-50 basis points (bps) this year.
In its Economic Research report today, MARC said it believes the stronger-than-expected headline growth in 2017, backed by the strength of the external sector and resilient consumer spending will be the driving force for the possible rate hike in the near term.
On the fiscal side, MARC said it is of the view that the government’s revenue target is achievable if the current uptrend in the global economy is sustained throughout 2018.
Beyond 2018 however, MARC said it anticipates that the government would have to find more revenue sources to complement its existing income base as it is risky to depend on oil-related revenue based on current oil market developments.
This year, the rating agency said it expects private consumption to remain resilient, growing by an average of 7.2%.
Furthermore, MARC said the external trade is key to the country’s economic performance in 2018, noting it expects Malaysia’s real exports to grow by 4.5% this year.
It added that the domestic economy will also benefit from higher contribution from investments in 2018, noting the ongoing large infrastructure projects such as MRT2, LRT3, Pan Borneo Highway, Menara Warisan and others will continue to support the upward momentum in investment.
As for inflation, MARC said it expects both cost and demand pressures to rise and hold the inflation rate at around 3% in 2018.
“The lag effect from higher pump prices and rising food prices in the past few months will likely persist in 2018. The recent rally in commodity prices such as crude oil will likely add to the upward price pressure as well.”
Nevertheless, MARC said while Malaysia remains vulnerable to capital outflows due to the large holdings of government securities by foreign investors, several positive factors will likely be supportive of the ringgit against the US dollar.
“They include the expected weakness of the greenback against major currencies in view of a synchronised recovery of the global economy; Malaysia’s commendable export performance; a strong domestic economy, supported by consumer spending and investments and; an expectation of an interest rate hike which will result in net capital inflows into Malaysian shores,” it added.