Bank Negara may raise OPR to 3.25%

PETALING JAYA: Bank Negara may raise its overnight policy rate (OPR) by 25 basis points (bps) to 3.25% next year due to inflationary pressure and a sharp increase in domestic demand, analysts said.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng told StarBiz that there should be a sharp pick-up in the inflation rate, mainly above 3%, along with a significant jump in domestic demand for the central bank to increase the OPR rate.

“The OPR is unlikely to increase in the first quarter due to the risk that the Federal Reserve might taper its quantitative easing programme. The OPR could possibly be revised as early as in the second quarter depending on the inflationary pressure,” he said.

Yeah said Bank Negara might increase the rate by 25bps in the second quarter and that the hike would only be made depending on the country’s economic growth momentum and how fast the inflation rate rises.

Meanwhile, Alliance Research chief economist Manokaran Mottain believes that the chances of Bank Negara increasing its OPR are “greater” in the second half of 2014 due to inflationary pressure.

“For the first half, inflation may increase to 3% mainly due to cost-push from further subsidy rationalisations and tariff adjustments. Usually, the central bank would not react on cost build-up,” he said.

Cost-push arises when businesses increase prices to maintain or protect profit margins after experiencing a rise in their costs of production.

He sees measures coming in in the second half of the year when demand rises to heighten demand-pull pressures in the second half of the year, which might see Bank Negara revising its OPR by 25bps to 3.25%. Demand-pull inflation, which occurs when total demand for goods and services exceeds total supply, responds better to monetary tightening.

He is expecting the inflation rate to increase to 3.2% by end-2014.

RHB Research Institute has lowered its earlier expectation of a 50-bps hike next year, as the central bank’s focus is on economic growth, which is still vulnerable to setbacks, while the rise in inflation is viewed as “temporary” due to policy-induced factors.

In a note to clients, the research house said that Bank Negara may raise its OPR by 25bps to 3.25% from the third quarter of 2014 onwards due to price pressure build-up from a possible fuel price hike in 2014 and the implementation of the goods and services tax in 2015.