Up 25 basis point, low interest rate days over?

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In case you did not yet know, our Bank Negara has hiked the overnight policy rate (OPR) by 25 basis point. In number term, this is 0.25 percent. A quarter of 1 percent. Assuming the banks use the exact same rate for the mortgage loan adjustments, then the difference in mortgage payment for a RM500,000 loan at 4.25 percent versus a 4.5 percent is RM69. (With both having a downpayment of 10%) For a RM300,000 loan, the difference would be RM41.50  (With a downpayment of 10 percent for both).  Of course, it is quite a huge thing if the owner have fifty units of RM500,000 properties. Anyway, based on an article in TheStar, the title says “low interest rate days are over.”  Personally, I do not think this hike means anything significant yet. It basically tells us that just like some other central banks around the world (including Federal Reserve and Bank of Korea), our BNM feels that the economy is now strong enough for a rate increase. (plus to control inflation etc etc).

According to the article, for retirees with more savings and no loans, this hike is a good news. Anyway, this is what AllianceDBS Research chief economist Manokaran Mottain said, “For the banking industry, the rate hike means higher margins from variable rate products.” (I think this is the reason why banking stocks went up in tandem with the announcement too. By the way, there also news about the continuous strengthening of the ringgit too due to this hike. Seriously, any appreciation of the ringgit must be due to good trade numbers; surplus as well as good export numbers and NOT due to a simple 25 basis point up yeah)  other predictions in the article include that of Citigroup Inc economist Kit Wei Zheng which says that their target is for ringgit to move to 3.80 due to supportive fundamentals and broad US dollar weakness.

This is what BNM says in a statement. “Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy.”  Last but not least, Manokaran said, “Overall, we do not see this to be the start of a monetary tightening process. In other words, we do not expect any more hikes for the next 12 months, at least.” Full article in TheStar here again.  Another article in TheEdge here. (Pretty good reading)

I think I agree with him (Manokaran) totally. I think this is just a pent-up one off hike which so many analysts have been expecting and no further changes are warranted unless the economy continues to show strong set of numbers. Perhaps we should just let Federal Reserve to take the lead, since they are the largest economy in the world? With so many CHANGES there including a BOLD new President in Trump, I am sure U.S. would take firm steps to strengthen their economy further. Till then, just note that an interest rate hike is always double-edged. Rushing to do anything simply because of some surveys of bankers showing they favour a hike in the near future is not a wise decision. Nope, a survey of Malaysians in general is also not a good idea. Just let BNM people do their job based on their access to big date yeah. Cheers.

written on 26 Jan 2018

Next suggested article: Ringgit should be driven only by fundamentals and genuine trade

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