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| July 10 Decision on OPR |
So for those having banking loans,personal loans and credit card charges, brace yourself for more pain.
Loan installments will go up and there is also the possibility of overdraft charges,hire purchase rates and credit cut interest moving north.
This will impact directly on disposable income caused by collateral inflation thus further straining the pocket book of the working class .
The imminent increase in interest rates has caused anxiety among some Malaysian households, as the prospects of higher repayments for their outstanding loans will likely put further strain on their spending power.
While the impact on those earning between RM 4,000 to RM 7,000 (40%) can possibly be contained; salaried workers earning less than RM 4,000 will certainly be disadvantaged.
A sobering effect to be considered is that 80% of Malaysian households fell into the income bracket earning less than RM 4,000. This was confirmed by PEMANDU of the PM's Department.
The sad thing about inflation is that the government and its agencies unsympathetically raised all their tariffs at about the same time and the people have to bear the full brunt of it, all at one go!
To say that the poor are cushioned by the BRIM hand-outs is again elusive as not all has been given this financial support.
Oftentimes, legitimate applicants are denied this assistance by the Internal Revenue Board due to technical reasons, unreasonably refining the concept of household income in a straight-jacket fashion, with the fact that family members or even married couples who stay at separate addresses are not getting nothing from the BRIM hand-outs. In fact, it is true that some who eat out at shops before coming home have their income included into household income to inflate it unjustifiably.
As for the tax-paying middle income group, they are as usual, left out on the lurch, from the benefits of the social safety nets!
Characteristically they take out more housing loans from banking institutions than the lower income group, which makes up another 40% of the Malaysian population.
Another thing to take note is the heavy indebtedness of Malaysian households. Malaysian households have turned out to be one of the most heavily indebted in the South-east Asian region. At 86.8% of the country’s gross domestic product (GDP), Malaysia’s household debt level is the highest in Asia, slightly ahead of South Korea’s household debt level at 86% of its GDP, and Singapore’s 77% of GDP.
Bank Negara concedes that Malaysia’s household debt level is not likely to come down anytime soon, as demand for credit is expected to remain strong over the next few years, driven by the spending pattern of a young consumption prone labour force and increasingly affluent urban population.
Statistics show the bulk of Malaysia’s household debt is made of home-mortgage loans, as households take advantage of the current prevailing low interest rates to buy properties, leading to increased demand, and eventually, the significant ramped-up in property prices in the country in recent years.
By and large, the looming interest rate increase will have negative implications for most consumers, as mortgage rates, which in Malaysia is pegged to the base lending rate (BLR), will rise as will future hire-purchase and personal loan rates.
The expectations of an interest rate hike have been rising since BNM sent out the clearest signal early this month that it might have to adjust the degree of monetary accommodation to address the continued build-up of economic and financial imbalances in the country so that these risks do not undermine Malaysia’s growth prospects.
Most economists expect the overnight policy rate (OPR) hike to take place when BNM’s Monetary Policy Committee (MPC) convenes its next meeting on July 10.
BNM has left the OPR unchanged for the past two years. The last revision took place in May 2011, when the MPC decided to increase the OPR by 25 basis points (bp) to 3%.
According to economists, the impact of an interest rate hike on households will ultimately depend on the quantum of the rate increase.
A 25 bp increase to the benchmark OPR from the current 3% to 3.25% – which is what is widely expected by the financial community – is unlikely to cause any serious dent, economists argue.
“Based on our assessment, many households will likely be able to absorb any increases in debt obligations arising from a 25 bp increase without experiencing any severe circumstances,” Manokaran says.
“And at a higher rate of 3.25%, we think the OPR is still accommodative to growth,” he adds.
Zahidi concurs, saying, “The impact will not be that significant although consumers will still end up paying slightly more for their mortgages and future hire purchases.”
“But if another hike takes place, pushing the OPR up by 50 bp (from the current level), then the impact on consumers will likely be more pronounced and this may lead to further moderation in private consumption growth,” Zahidi argues.
Economists in general do not expect BNM to take a too aggressive stance on its monetary policy, given the negative implication on the country’s economic growth as a whole.
Expecting BNN to make only gradual adjustments to the country’s policy rate, RAM Ratings head of research Kristina Fong notes that “BNM has embarked on a very holistic approach to their policy rate decision.”
“Any decision made by BNM would have been well assessed so as to avoid any adverse impact on growth sustainability,” she argues.
Sharing the same sentiment, Bank Islam Malaysia chief economist Afzanizam Abdul Rashid says: “We do not subscribe to the idea that the central bank would aggressively tighten its monetary stance. A 25 bp hike would be sufficient enough at this juncture since growth in the second half of the year is expected to moderate on account of the implementation of subsidy rationalisation.”
Economists reckon that the prolonged period of low interest rates in Malaysia is a major driver of rising household debts in the country. The low borrowing costs have also encouraged many households to use borrowed funds to invest in speculative activities to seek higher returns, as partly evidenced by the significant increase in asset and property prices in the country in recent years.
“The adjustment in OPR is necessary to avoid risks of financial imbalances becoming more entrenched as the existing macro prudential measures have yet to exhibit significant slowdown in lending to households,” Afzanizam explains.
Drawing an example from the collapse in the US sub-prime mortgage, which subsequently led to the 2008/09 global financial crisis, Afzanizam argues that there are always dire consequences of keeping interest rates too low for too long.
“The recent upturn of GDP growth data clearly suggests that Malaysia’s economy is on firmer footing, and therefore, any form of economic stimulus (which include low levels of interest rates) should be withdrawn in order to ensure growth remain sustainable,” Afzanizam says.
So, let us wait with baited breath whether BNM will increase the overnight OPR.
If it does, expect a big bite on your pocketbook for mortgages and all sundry loans!
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