Friday, July 1, 2011

CIMB Economics Research sees BNM raising OPR to 3.25% in 3Q

KUALA LUMPUR: CIMB Economics Research is maintaining its expectations that Bank Negara Malaysia (BNM) will raise interest rate by 25 basis points to 3.25% in the third quarter.

It said on Friday, July 1 that however, the timing would be a close call between July and September.

'Compared to the previous rate hike in May, we think the confluences of external headwinds have tilted the balance of risk towards the downside for the growth outlook,' it said.

At the monetary policy committee (MPC) meeting on July 7, it said BNM would have to make a careful assessment whether the slowing growth is transitory or of a more fundamental nature.

The crucial issue would be whether the current soft patch will be short-lived or prolonged before making a move on interest rates.

'The recent string of incoming data suggests domestic economy has hit a soft patch, hindered by Japan's supply chain disruptions, a loss in growth momentum for the US and China as well as resurgence worries about the Europe debt woes,' it said.

In its comments of May's loan growth, it said BNM data showed it rose to 13.8% on-year from 13.5% in April, boosted by sustained demand from both household (13.0%) and business (14.8%) sectors.

As for money supply, it grew by 11.1% in May from 10.1% in April. The factors were higher trade inflows and credit expansion.

CIMB Research said all loan indicators showed improvement, with loan applications and approvals rising by 27.0% and 26.9% respectively in May (19.5% and 24.0% respectively in April).

Loan applications for the purchase of residential property rose 4.4% on-month or 30.3% on-year in May. Credit card loan applications contracted by 5.5% in May (+1.6% in Apr), reflecting the impact of credit card restrictions which took effect in March.

Loan disbursements turned around to grow by 11.9% (- 1.1% in April), thanks to higher disbursement to the business sector.

'With still-strong loan indicators, we upped our loan growth estimate to 11.0%-12.0% this year from 10.0%-11.0% previously,' it said.

CIMB Research said the banking system remained flushed with liquidity, underpinned by the sustained trade surplus and private capital inflows, which were predominantly short-term flows in recent months.

It pointed out that BNM had used a wide range of monetary instruments to sterilise the capital inflows to avoid excessive monetary conditions.

'The amount of excess liquidity mopped up by BNM amounted to RM281.8 billion as at mid-June 2011. The statutory reserve requirement (SRR) ratio was raised by 200 basis points in April-May to 3.0% currently, to mop up excess liquidity and restraint credit creation.

'We expect another 100bp rise in the SRR to 4.0% in July,' it said.

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