Malaysia: Potential Rate Hike?

Just when you think that Bank Negara Malaysia is impervious to savings and pensioners for the last couple of years,her comes Arab-Malaysian Banking Group giving their considered opinion that there could be a possible rate hike this year. How much? They opined a whopping 50 basis points. Why so? They say they were influenced by stronger economic economic conditions.

This is the report from the Business Times Singapore.

"The onset of the global financial crisis set the stage for interest rate cuts worldwide and the central bank followed suit, slashing rates aggressively by 150 basis points to bring down the overnight policy rate to 2 per cent.

Indeed, the three-month Kuala Lumpur Interbank Offered Rate now stands at 2.2 per cent which is a 20-year low.

The report noted that growth in gross domestic product terms showing signs of a turnaround with third quarter GDP contracting at 1.1 per cent compared to contractions of 3.3 and 6.2 per cent in the second and first quarter respectively.

Loan applications for the month of November also lent credence to stronger growth going forward: it rose 36.8 per cent year on year. In fact, the report noted that the actual figure applied for in November was RM47.8 billion, not far off from the last peak of RM52.8 billion set in August 2008.

In tandem with that, total loans approved in November rose by 37.8 per cent year on year compared to 25.4 per cent in October. Loans approved for the business community for the month rose almost 46 per cent.

Meanwhile,inflation which was negative in July was flat in November, indicating that inflation was likely to creep back to positive territory by the second half. Indeed, with rising global oil prices, the uptick could come even earlier.

With inflation and growth coming back, it seems only a matter of time before the central bank adjusts rates upwards. “Our assumption is for a one-time 50 basis points increase in the second half of 2010,” the Arab-Malaysian report predicted.

If that is borne out, it will be good news for savers who were penalised in 2006 and 2007 when real interest rates were actually negative because of inflation outstripping the cost of money.

It will also be good news for the banks. According to the Arab-Malaysian report, earnings growth for the banking sector as a whole for 2010 could be as much as 40 per cent. Growth in 2009 is estimated to be around 8 per cent.

The better earnings growth is expected to stem from lower loan-loss provisions which are expected to decline by 17 per cent after jumping 19 per cent last year.

The report indicated that its estimate of a 50 basis points increase was “conservative” as the central bank had actually slashed rates by 150 basis points since the onset of the global financial crisis. Thus, it was “not inconceivable” that the central bank make a bigger rate hike."

Do we dare a hope a 150 points rise? Nah! For a start,be thankful for 50 basis points.