OPR likely to remain unchanged till end-2018

PETALING JAYA: PublicInvest Research expects Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) unchanged at 3% for the rest of 2017 and throughout 2018.
BNM, which will be holding its final policy meeting of the year next Thursday (Nov 9), is not expected to make any changes to the OPR or statutory reserve requirement (SRR), which is likely to stay at 3.5%.
"The expectation is based on several mutually reinforcing factors. First, there is muted demand-driven inflation as year-to-date (YTD) inflation of 4% is only pass-through impact of higher global oil prices. This is further supported by tepid YTD core inflation of 2.6%, which is 70 basis points lower than the 2016 average," it said in its report last Friday.
It said that there are no signs of excessive liquidity that could stoke inflationary pressure, namely the level of M3. YTD, the average broad money (M3) growth is only 4.5% which is conducive for the projected growth of 5.3% this year.
In comparison, M3 growth for 2011 till 2014 were 14.3%, 9%, 7.3% and 7% respectively, where average inflation reached 3.2%, 1.7%, 2.1% and 3.1%. M3 growth back then was much higher but inflation rate did not show any sign of pressure.
"Secondly, there is no letting-up on Malaysia's growth momentum particularly after the strong 1H17 growth of 5.7%. Average growth of 6.5% for the first two months of 3Q17 industrial production index (IPI) (July and August) has surpassed 1H17's average of 4.3%, suggesting that growth momentum in 3Q17 will continue to be good. Therefore, the risk of decelerating economic momentum can be discounted," said PublicInvest Research.
Thirdly, the research house does not see any sign of financial imbalance risks. Loan growth YTD is only 5.7%, matching last year's average, giving no sign of excessive credit growth.
It also does not see asset price misalignment, with a not overly robust equity market performance.
"There are also no signs that property prices will see further significant uptrends particularly in absence of notable targeted interventions by the authorities. In fact, YTD residential loan growth has only averaged 8.8%, lower than 2016's average of 10.3%. All these support our conviction that OPR may remain unchanged for the rest of the year," it said.
For 2018, PublicInvest Research expects steady policy rates which will be conducive for the equity market.
It expects core inflation to remain tepid at 2.7% in 2018, slightly higher than 2017's estimate of 2.6% and it does not expect any flood of liquidity in the market due to the normalisation of capital flow. M3 growth is unlikely to be so much higher, when 2018 growth projection is likely to be slightly slower than 2017.
"Any adjustment on policy rates to match the series of US rate adjustments, speculated to be about two in 2018, will only choke growth. No doubt the ringgit will benefit but we don't think that it is currently suffering from weak fundamentals, hence, able to withstand temporary volatility," it said.
It added that the targeted intervention by the central bank to alleviate ringgit volatility will help the currency and given these catalytic factors, the ringgit will eventually revert back to fundamentals, driven by decent growth and sustained current account surplus.
Globally, the normalisation of growth due to the changing prospects of advanced economies, namely the US and Eurozone, will support Malaysia's prospects while spillover effects of China's trade will benefit Asean counterparts.
"We think the US will undertake a very measured pace of interest rate adjustments. The policy authority may also defer it if the adjustment shows signs of hurting growth," it said, adding that the current tepid inflation trend may cast doubt on the speculated two rate adjustments next year.
Meanwhile, Malaysia's engine of growth next year will continue to be driven by private consumption and adjustment to policy rates at this stage will weigh on consumption more so when consumers have to adjust with slightly lower spending ability in 2018.
"Asset price misalignment and excessive credit growth is almost negligible as the authority is seen as more targeted in their approach to avoid financial imbalance risks."