Bank Negara likely to keep key interest rate on hold in November – DBS Bank

The Malaysian central bank, Bank Negara, is expected to keep its key interest rate on hold this week. According to a DBS Bank research report, the BNM is likely to maintain the Overnight Policy Rate at 3 percent. The data flow has been showing solid growth but modest inflation. Growth momentum is likely to bolster, which would probably fuel inflationary pressure going forward. The Malaysian government has announced a generous budget before the election, which would possibly be held in the second quarter of 2018.

“Juxtaposed with an increasingly positive global outlook, which will continue to support export performance, overall GDP growth for 2018 is now expected to register 5.0% in 2018, up from our previous forecast of 4.6%”, stated DBS Bank.

Given strong economic growth, domestic inflationary pressure is expected to rise. The output gap is turning increasingly more positive and notwithstanding the positive effect on growth, higher oil prices in the future could also contribute to domestic price pressure.

The U.S. Fed is likely to raise interest rates by additional 100 basis points by the end of next year. This might exert pressure on Asian currencies, including the ringgit. With pressure on the ringgit and rising inflation, Bank Negara might be forced to act in the second half of next year.

“We have penciled in two rate hikes of 25bps each in 3Q18 and 4Q18. This will bring the Overnight Policy Rate to 3.50 percent by the end of 2018”, added DBS Bank.

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