MONETARY POLICY: Bank Negara expected to start its hiking cycle in May or July 2014, says forex strategist
BANK Negara Malaysia will likely keep the borrowing costs unchanged for the rest of the year, although pressures will start to build up in the first half of 2014, said a forex strategist.
Wong Chee Seng of AmBank group expects the central bank to start its hiking cycle in May or July 2014.
"Historically, Bank Negara has a tendency to raise the rate in May or July and with a tendency of rate cuts in the first half of the year," he said.
The Monetary Policy Committee's final meeting is on November 7.
So far, Bank Negara has had one cut in 2008 and two cuts in 2009, which were usually in the first half of the year, arguably as it took at least five to six months for the effects to filter through the system, he noted.
Wong said the upward movement of the United States Treasury rate is one of the key factors to watch out for in a shift in monetary policy.
Other factors are the Consumer Price Index (CPI) level moving above three per cent, upward pressure on interbank rates and continued decline in output growth.
"Our central view is that Bank Negara will likely keep the overnight policy rate stable for the remaining part of the year. It is in its best interest to keep the rate stable because a rate cut will raise pressure on formation of household debt, which currently stands above 80 per cent of the gross domestic product, and we do not think rate cuts will optimise growth potential."
A rate cut will raise depreciation pressure on the ringgit on the back of narrowing interest rates differential in favour of the US.
"We see little chance for a rate hike unless it is for the purpose of defending the ringgit or that the US Treasury 10-year yield breaking above 3.5 per cent on a sustainable basis," Wong said.
Inflation, he added, remains manageable and will unlikely challenge Bank Negara's implicit inflation band that the research house assumes to be in the range of one and half standard deviation of mean 2.38 per cent respectively.
"The recent hike in fuel prices is largely seen as supply-push inflation and will likely peak somewhere in October or November."
The January-July CPI inflation is at 1.7 per cent and is expected to be contained at around 2.0-2.2 per cent for the whole year.
He also said it is unlikely for the one-off fuel price adjustment to have a prolonged secondary feedback effect of inflation in 2014.
With the combined weights of petrol and diesel accounting for about 7.6 per cent of the CPI weights, the research house estimates that for every 1.00 per cent increase in fuel price, it should add 0.08 percentage points to the CPI directly.
"We anticipate the price pressure to surface in the later part of first half of 2014 on the back of possible measures in the 2014 Budget to address government revenue collection, resumption of subsidy rationalisation programme, rebound in commodity prices and the lagged effects from the depreciating ringgit against the US dollar," Wong added.
Although these pressures are just enough to activate Bank Negara's inflation monitoring, it is not a strong case to act on it, he said.