Minimal impact on local businesses from OPR hike

• 3.25% OPR is still at an acceptable level
• Negative for companies with high ringgit borrowings

THE Jan 26 decision by Bank Negara Malaysia to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25% was met with generally positive reactions from economists and research houses, with a future rate hike thought to be on the cards by some.

Commenting on the OPR hike’s impact on local businesses, independent economist Lee Heng Guie points out to Digital News Asia that it is a small hike.

“Of course, it will have some impact on those who have high borrowings. But it [the hike] is quite small, most can manage that though some would be displeased with the hike.

“However, I think overall, looking at the external and internal economic conditions, the time is right for the Central Bank to move to normalise the interest rate and this 3.25% is still an acceptable level. It’s not a level that could significantly dampen spending, investment or cause a significant rise in cost of servicing loans for those who have business loans,” he adds.

In a strategy note late yesterday, Standard Chartered Bank viewed the rate hike as a reversal of the likely ‘pre-emptive’ July 2016 rate cut.

“BNM said the hike is ‘pre-emptive in nature to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time’. The central bank also toned down its rhetoric on core inflation, stating that it “remains moderate”; there was no mention of core inflation ‘being sustained’. Furthermore, we expect the growth momentum to wane going forward and do not expect inflation to threaten medium-term price stability,” Standard Chartered said.

“Further rate hikes by BNM will likely weigh on household spending and private investment. On inflation, both headline and core inflation have eased in recent months on the back of lower food and services inflation. Given BNM’s focus and rhetoric on core inflation, a further moderation in core inflation would reduce the risk of a rate hike by the central bank.”

AmBank group chief economist and head of research Anthony Dass held a slightly different view on future rate hikes.

In a note, he said that another rate hike in 2018 is still on the table as they feel the current firm growth path allows for it. “Besides, we believe the normalisation rate for the OPR should be around 3.50%.”

CIMB Equities Research views the OPR hike as positive for banks, as the upward re-pricing of lending rates have historically been higher than the increase in deposit rates, which has led to potential expansion in banks’ margins.

Semiconductor players are also beneficiaries as they are in net cash, the research house said in a strategy report today. It also said the rate hikes are negative for cyclical sectors such as property, auto as well as consumer due to lower disposable income.

“It is also negative for companies with high gearing in ringgit borrowings as it will result in higher interest expense,” the research house said.

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