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BNM Hike OPR Amid Strong Economy Growth January 26, 2018
Malaysia’s Central Bank, Bank Negara Malaysia raised the Overnight Policy Rate (OPR) by 25 basis points for the first time in 3 and half years. In this article, we would like to discuss the impact from the OPR hike.
Author : Jerry Lee Chee Yeong


BNM Hike OPR Amid Strong Economy Growth

Malaysia’s Central Bank, Bank Negara Malaysia raised the Overnight Policy Rate (OPR) by 25 basis points for the first time in 3 and half years. The rate hike decision was out of our expectation as we previously foresee the rate hike decision will only come in after the second quarter. The latest floor and ceiling rates of the corridor for the OPR are raised to 3.00% to 3.50% respectively.

Figure 1: Malaysia OPR

The Central Bank believes that the growth momentum of the local economy is likely to sustain into 2018, underpinned by synchronised global growth which would boost the local trade growth and the recovering domestic demand, a result of favourable income and labour market condition. As such, the Central Bank opines that the rate hike is appropriate in order to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time.

Having said that, we believe that the Central Bank might not further tighten the monetary policy as the intention is to normalise the interest rate and any further hikes would weigh on the economy growth moving forward. As such, we do not foresee any significant impact from the OPR hike.

Banks To Benefit From The Rising Interest Rate

As we have mentioned before, Banking sector is likely to be the biggest beneficiary of rising interest rate due to the expansion in net interest margin, we would like to reiterate our bullish view on the Banking sector in 2018.

Strengthening Ringgit

On top of that, the rather hawkish monetary stance as well as the FEA rulings coupled with strong exports continue to push Ringgit to 1 and half year high level (see figure 2). Hence, we see a brighter prospect for the Auto, Aviation and the Private Healthcare sector which will benefit from a stronger Ringgit by having lower operating cost. However, the exporting sector is likely to take a hit on the strengthening Ringgit due to the diminishing competitiveness. As such, we believe that the outperformance gap between small cap and the big cap segment is likely to narrow as most of the mid to small cap companies fall within the exporting category.

Although the strengthening Ringgit is likely to hurt the exporting counters, we believe that the synchronised global growth is likely to boost the external demand, hence, offset the impact of the strong Ringgit.

Figure 2: USDMYR

REITs Sector Is Likely To Take A Hit

The rate hike decision is likely to hurt the REITs players in term of higher borrowing costs that might dampen the earnings of these players. However, the impact would vary according to the debts structure of the respective REITs (variable loan vs fixed rate loan). In fact, the local REITs Index dropped 0.7% yesterday after the Central Bank announced rate hike decision.

On top of that, generally, rising interest rate is likely to narrow yield spreads by putting an upward pressure on the risk-free rate or the government security, which might subsequently cause the yield from REITs to look unattractive. However, by looking at the government yield curve, instead of an upward pressure, one might observe the government yield dropped significantly since the local Central Bank’s hint on possible rate hike (9th November 2017) and remains rather flat after the rate hike announcement (25th Jan 2018) as compared to the day before. In fact, this can be explained by the increasing foreign inflow into the MGS space where the foreign investors are confident that the upside from currency factor is likely to outpace the downside of interest rate hike, hence, pushing down the overall government bond yield.

Figure 3: MGS Yield

Conclusion

All in all, we continue to be positive on the local equity market and economic growth despite the current rate hike decision. After stepping into 2018, we believe that the bigger cap companies are likely outperform the smaller cap companies after considering the impact of a stronger Ringgit and the continuing foreign inflow that is likely to further support the bigger name companies.


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