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Economic Growth, Interest Rates, Stronger Ringgit and Slowing Export

After a very positive H1 2014 in terms of GDP growth for Malaysia (6.3%), the full year forecast is now expected to be stronger than that estimated previously by all analysts. Referring to StarBiz’s poll of economists, the GDP forecast is averaging at 5.8% and three economists are predicting a growth of up to 6% for 2014! According to RHB Research Chief economist, “Although domestic demand growth will likely moderate in the second half, dampened by slowing government spending due to the fiscal consolidation drive and curbs on the property market, it will likely remain resilient and act as the main anchor of growth during the year. We expect consumer spending to hold up and private investment to remain relatively strong amid elevated price pressures,”.

In easier to understand language, it meant that first half growth is too positive and may not be repeated in the second half. However, while it will slow compared to first half, everything would remain relatively positive/resilient. Consumer spending would continue and private investment is still continuing.

Next would be the interest rates. Some analysts say that Bank Negara would be raising the overnight policy rate (OPR) by another 25 basis points in September while some said that Bank Negara would keep the existing OPR rate for the whole of 2014. The reason for the hike in September is due to the need to address the negative real interest rate situation in Malaysia. This happens when the inflation rate is HIGHER than the fixed deposit that you get from the banks. With a higher OPR, it will also ensure financial stability and further keep the inflation in check. Another reason is because of the growth which has been encouraging and thus interest rate can be raised further without impacting the growth too much. (With higher interest rate, people may be encouraged to save more and this may reduce the demand and thus impacting growth)

For those who believed that OPR rates would remain steady till end of the year, they feel that inflation level in Malaysia is still manageable. Thus a hike may not be good as it may slow down the country’s domestic demand and this in turn would slow down the growth. Besides that, any interest rate rise is likely to strengthen the Ringgit further and this may affect the export performance. (Strong Ringgit means countries importing from us may choose to import from countries with cheaper currency instead)

I am not a financial analyst. I do have a business qualification from a good business school in UK and an accredited MBA. Instead of calculations or stats, from what I can see in terms of demands for cars, purchase of new handphones, the always full Starbucks as well as mushrooming of even more specialty cafes meant that the consumer confidence remain to be positive even if not considered extremely high. I do not see any impending reasons why consumer spending may be slowing down. Come on, even Iphone 6 is launching soon. Take a look at the queue which will build up. In this sense, I would support the view that Bank Negara should increase the rate further to keep everything more in check and gives more flexibility in future for Bank Negara to adjust interest rate to support growth when possible. Only problem for me is that my mortgage payments would also increase. I think it may be better for me to sell a property soon to reduce this mortgage pressure. 🙂

written on 19 Aug 2014

Next suggested article: Speculators, Interest Rates and Over-Leveraging

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