To panic or not to panic?
While many people were rightly worried by the news (how will this affect me; everything is already going up, not this too), analysts were quick to reassure that this move will have minimal impact on private consumption. However, this move by BNM comes at a time when the country’s inflation rate is at its highest in nine years, and issues related to the cost of living dominate the political scene.
AllianceDBS Research chief economist Manokaran Mottain described the central bank’s decision to raise the key rate as a tough one, saying, “With a strong growth momentum, low interest rates are feared to result in financial imbalances. The hike was largely due to the high inflation rate while low interest rates coupled with the strong growth momentum may result in financial imbalances.”
BNM’s official statement echoes that sentiment: “The Monetary Policy Committee (MPC) recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time”.
The government is forecasting the strengthening of the economy, with a growth of as much as 5.5% in 2018, buoyed by a global trade recovery and rising domestic spending. The markets classified as emerging include Malaysia, China, India, Indonesia, the Philippines and Thailand.
These APAC countries are expected to have their economies grow by 6.5% this year. Generally, Malaysia is seen as a country with the fastest economic growth in the region due to the dynamics in its economy. What are some of the industries that either stand to gain or lose from this hike? We take a look at the top five:
1) Financial institutions
Financial institutions will be the ones to benefit most from this hike, as they will be able to increase their lending and deposit rates accordingly. Historically, the upward re-pricing of lending rates have been higher than the increase in deposit rates, allowing for possible growth in the margins of banks. There also isn’t any indication of a significant impact on the loan growth and asset quality of the banks.
Those who have kept a bulk of their savings with banks (chiefly retirees) will thus see a better rate of return on their deposits; consumers on the other hand would need to deal with the higher interest rates.
As mentioned, consumers will have less spending power so the automotive industry may be adversely impacted since people will not be as inclined to purchase a new set of wheels. This will be felt especially by the brands who are exposed to the mass market such as Proton and Perodua. Additionally, this sector will have to bear the brunt of expected higher interest cost, given the high gearing level for most companies.
Economic analyst Prof Hoo Ke Ping is of the opinion that the interest rate hike will help to discourage property speculators by making it more expensive for new speculations to take place. On the other hand, existing speculators will want to dispose of the property they’re currently holding in order to avoid attracting higher repayments.
The speculators who would be hardest hit are the ones who buy in large quantities, as they would have had to take out large loans to finance their purchases. “It is not unthinkable that many will seek to unload properties at a much lower price, potentially benefiting those who are currently unable to own homes,” said Hoo.
On the property developer’s side, the interest rate hike could force them to rethink their pricing strategies as there’s already a supply excess, particularly in the high-rise segment. “Stock owned by property developers in the form of apartment lots and units and others will have to be sold at a lower price to make them more attractive as consumers would be less interested in bank loans, which would cost them more,” he elaborated.
In the beginning of the article, it was mentioned that this move will have minimal impact on private consumption, but how much is ‘minimal’? According to a strategy report issued by CIMB Equities Research, they are of the opinion that the bigger impact would actually be felt by the topline of consumer companies.
This can be attributed to the higher interest costs that consumers would have to fork out, causing a reduced spending pattern in view of the higher costs of living.
5) Oil and gas
The strategy report went on to detail how, in the oil and gas sector, they see a possibility of one company that is a clear winner in benefiting from the higher Malaysian interest rates: Petronas Dagangan. As they are in a net cash position of RM3.8bil, the OPR of 3.25% could lift their financial year 2018 earnings by 1%.
However, it is expected that most of the companies in this sector will not be affected by the interest rate hike given their borrowings are largely US dollar-denominated.
Considering how the domestic financial markets have been mostly resilient and that the economy is expected to grow at a healthy pace this year, the MPC will continue to monitor and assess the current level of OPR and the degree of money accommodativeness. This is to ensure that it is consistent with the policy stance to ensure that Malaysia continues on a steady growth trajectory amid lower inflation.