Overnight policy rate raised 25 basis points to 2.50%

KUALA LUMPUR: Bank Negara has raised the country's overnight policy rate by 25 basis points or 0.25%, to 2.50%.

The move was to further normalise monetary conditions, governor Tan Sri Dr Zeti Akhtar Aziz told a press conference here Thursday.

She said the stance of monetary policy continued to remain accommodative and supportive of economic growth.

Ringgit rising

The ringgit has been strengthening against most of the world’s major currencies since early this year. But will this trend sustain?

ZAINAL Azhar has been shopping for the best rates to swap ringgit for euros for his upcoming business trip to Germany. The 40-year-old businessman from Kuala Lumpur says he has been buying euros in phases in preparation for the visit next month.

His friends, Susan Lee and Albert John, are also watching how the ringgit is faring against other currencies. Lee, a financial analyst in her 30s, has been waiting for months to score a “cheaper” vacation to the United States, while sixtysomething John is sending his youngest son to Britain for further studies.

The trio are hoping to get the most bang for their bucks when they exchange their ringgit for other currencies.

So, the recent rise of the ringgit bodes well for individuals like them – not to mention for those who like to shop online for overseas products. Since early this year, the ringgit has been strengthening against most of the world’s major currencies.

On nominal terms, the ringgit has appreciated about 6.7% year-to-date against the US dollar. The ringgit is now hovering at a two-year high against the greenback at 3.19, compared with 3.42 at the start of the year, and last year’s peak of 3.72 recorded in March.

Against the British pounds, the ringgit has strengthened from 5.5 early this year to around 4.9 currently. The ringgit has also risen against the euro from 4.88 early this year to about 4.28 currently.

Against the yuan, the ringgit has reached almost a two-year high over the week to 46.79 sen from 50.15 sen early this year, while against the yen, the ringgit has appreciated 6.9% year-to-date and 8.6% year-on-year to hover around 3.749 per 100 yen.

Other regional currencies are also trending similarly, including the Singapore dollar (which has just been revalued by the country’s government) and the Indonesian ruppiah.

Driving factors

Compared with other regional currencies, the ringgit has nominally gained the most against the US dollar since the start of the year.

Says Affin Investment Bank chief economist Alan Tan: “The ringgit is playing catch-up in the first half of this year as it lagged for most of the second half of 2009. Other regional currencies started gaining strength then.”

As most economists see it, the recent strengthening of the ringgit – and most Asian currencies for that matter – is mainly due to three factors: strong economic recovery and growth prospects for the Asian region, wide interest rate differentials between the US and Asia as some countries in the region have started to normalise their monetary policies and the widespread expectation that China’s lawmakers will allow the yuan to appreciate.

Amid the mounting pressure on China, there are growing expectations that the country will let its yuan appreciate against the US dollar in the second half of the year.

The correlation between the Chinese currency and regional currencies is strong – a rallying yuan will usually lift the regional currencies.

For example, the lifting of the ringgit peg to the US dollar in July 2005. This took place shortlty after China’s central bank revalued its yuan and shifted to a managed float.

(The yuan was pegged at 8.27 per US dollar from 1995 until mid-2005, when it was revalued upwards to 8.11 per US dollar and allowed to float against a basket of currencies, including the US dollar, euro and yen. In July 2008, the yuan appreciated 21% against the US dollar, and its value has since been pegged at around 6.83 per US dollar to this day.)


“The dollar will flow into high-growth regions, driving their currencies to appreciate,” OSK-DMG economist Enrico Tanuwidjaja tells StarBizWeek.

The World Bank expects developing East Asia (which includes Malaysia, China and Indonesia) to register 8.7% growth in gross domestic product (GDP) in 2010.

The Asian Development Bank’s projection is slightly lower at 7.5%.. Malaysia’s GDP growth forecast ranges from 5% to 7%. “The expectations of good growth rates are a major boost to investor sentiment,” says Alan.

More to gain or lose?

A recent CIMB Investment Bank report says that “the interplay of currency revaluation expectations and interest rate differentials will trigger more speculative inflows into the region.”

Malaysia’s move in raising interest rates since early this year has attracted some foreign fund inflows. This has led to the strengthening of the ringgit against major world currencies.

In March, Bank Negara raised the overnight policy rate (OPR) from a record low of 2% to 2.25%. The central bank is expected to raise the OPR again in the months ahead as part of the rate normalisation process.

This will widen the interest rate differentials between Malaysia and other developed nations, especially the US, that have been keeping and intend to keep their rates low for a longer period.

Economists say the widening interest rate differentials will continue to attract private funds to Malaysia as investors seek higher returns.

According to CIMB Investment Bank, the Malaysian equity market could “get a leg up from further OPR hikes.”

Foreign investors are seen to be taking a bet on asset reflation caused by a strengthening ringgit. Market analysts believe that in such instances, the most likely beneficiaries are blue chips such as banking and plantation stocks, among others.

ECM Libra Investment Bank says companies that derive their income mainly from the domestic or regional markets but have input costs or liabilities denominated in G3 (the US, Japan, and euro) currencies will gain.

Those in this category include Tenaga Nasional Bhd, UMW Holdings Bhd, AirAsia Bhd, Malaysia Airlines Bhd, Tan Chong Motor Holdings Bhd, QL Resources Bhd and KFC Holdings (M) Bhd.

Conversely, the strengthening of the ringgit will not bode well for exporters or companies that earn their income mainly in G3 currencies, and have input costs or liabilities denominated in the local currency. Fitting into this category, as analysts point out, are rubber glove and semiconductor companies.

From the international trade perspective, a stronger ringgit tends to make the country’s exports of goods and services costlier for overseas customers. In theory, this would inadvertently lead to lower demand for Malaysia’s products.

But economist Prof Datuk Dr Mohamed Ariff opines that the current appreciation of the ringgit will not significantly impact Malaysia’s export competitiveness because other regional currencies are also rising at the same time.

Says Tanuwidjaja: “Current external demand is driven mainly by intra-regional trade, while demand from developed nations remain relatively weak. The country will benefit more from the lower costs of imports and capital expenditure with a stronger currency.”

Bracing for volatility

Malaysian exports generally have high import content, and this could help mitigate the effects of a stronger ringgit on exporters.

It is estimated that for every RM1 of exports, 70% are intermediate goods imported from overseas. So, a stronger ringgit will help reduce production costs and help exporters maintain price competitiveness.

Will the ringgit’s uptrend continue? Based on current economic indicators, most economists say the trend is unlikely to continue.

They believe the ringgit is already near the tail end of an appreciating trend. They say the upside potential for the ringgit is somewhat limited and that some form of weakness will likely arise in the second half of the year.

Analysts believe the market should brace for volatility ahead as the ringgit’s appreciation is still vulnerable to the movements of international short-term capital.

“The outlook for the first half of the year is clearly an appreciating trend for the ringgit but uncertainties will set in by the second half of the year. Hence, the belief that the strengthening of the ringgit, and other Asian currencies for that matter, will not be sustainable in the latter part of 2010,” says Tanuwidjaja.

Economists believe the growth of Asian economies will be less vibrant in the second half, compared with the first half.

In addition, there is the possibility of policy change by developed nations, particularly the US, as the recovery of their economies gathers pace in the second half of the year.

It is widely speculated that the second half of 2010 will mark the end of the “extended period” for record low interest rates for the US.

Interest rate differentials between the US and other Asian economies will likely be narrower then. This will result in funds flowing back into the country, and the US dollar is likely to react favourably and regain its strength against other currencies.

Taking into account the possibility of this scenario, several local research houses have ascribed a year-end target for the ringgit against the US dollar at between 3.20 and 3.30.

Then again, what about the possible revaluation of the yuan?

Says Alan of Affin: “The market has already priced in such possibility, and even if there’s really a change in the yuan policy, we believe it will be gradual and moderate. We don’t think there will be any sharp or surprise movement in the yuan, so as to minimise the impact on China’s export competitiveness.”

Significantly undervalued?

It is generally perceived that several Asian currencies, including the ringgit and the yuan, are significantly undervalued against the US dollar.

Foreign studies claim that the exchange rate misalignment, in terms of undervaluation against the US dollar at the end of last year, for the yuan was as much as 40.7%.

For the ringgit, it was around 30.5%, while the Hong Kong dollar and the Singapore dollar were misaligned by as much as 32.2% and 24.7%, respectively.

While many Asian currencies have strengthened against the US dollar, their recent appreciation were merely nominal gains. Measured in real terms, that is, after adjusting for inflation, the gains of Asian currencies were only marginal.

The ringgit, in real effective exchange rate, has only strengthened by a mere 1% against the US dollar year-to-date, and less than 3% from mid-2005, when its peg to the US dollar was lifted.

Hence, some quarters argue that there is scope for the ringgit to strengthen further against the US dollar.

But Bank Negara has previously stressed that the value of the ringgit is determined by market forces and that its present value is already reflective of the country’s economic fundamentals.

“To be a domestic and consumption-based economy, a strong ringgit is needed. But let’s be realistic here. Many industries in Malaysia are still export-driven, and a strong ringgit over the short term will definitely hurt them,” says Alan.

He says the ringgit has already appreciated to a level where some manufacturers are beginning to feel a bit uneasy and anxious over the possible loss of competitiveness.

Economists argue that any form of intervention by the central bank in the ringgit exchange should be focused on smoothing out the sharp volatilities that could cause instability in the financial markets, instead of managing the ringgit’s value against other currencies.

Otherwise, says Ariff, “any attempt by the monetary authorities to rein in the ringgit, except under exceptional circumstances, would cause serious price distortions and contribute to inefficient allocation of resources.”

Towards high income

Having a strong currency is in line with any nation’s ambition to be a high-income economy.

“Strong” currency in this sense refers to one that is well demanded and has a stable value, with its exchange rate driven by economic fundamentals.

There are compelling benefits for Malaysia to aim for a stronger ringgit in line with its ambition to be a high-income nation.

For one, a stronger ringgit will make travelling abroad more affordable for Malaysians, hence enhancing their scope for leisure.

A stronger ringgit will also encourage the import of capital goods, which contributes to the innovation and automation of industries in the country.

Above all, a stronger ringgit will help improve the living standards of the people by increasing their purchasing power through cheaper imports and lower inflationary pressure.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says that unless profiteering activities are thwarted, a stronger ringgit may not necessarily lead to cheaper imported goods for Malaysians.

The benefits aside, “a stronger ringgit per se should not be the over-riding objective,” says Prof Dr Tan Eu Chye of University Malaya’s Faculty of Economics and Administration.

“A stronger ringgit must be consistent with the fundamentals of the country’s economy. If fundamentals dictate that the ringgit should strengthen, then it should be allowed to appreciate,” he says.

For the ringgit’s advancement to sustain over the longer term, the implementation and execution of Malaysia’s New Economic Model (NEM) is critical, says Maybank Investment Bank.

Although the first part of the NEM has already been unveiled, many are waiting for more clarification and details of the plan to gain a clearer picture of the changing fundamentals of the Malaysian economy.

The consensus view is that there isn’t any material change in the key economic fundamentals of Malaysia yet. Hence, the unveiling of the second part of the NEM will be critical.

The World Bank says that as long as a stronger ringgit is justified by improved fundamentals, it can help the country gain mileage towards becoming a high-income nation.

“Otherwise, complacency may set in and we may not be able to sustain the high-income status eventually,” says Eu Chye.

Fixed deposit rates on the rise

This follows Bank Negara’s move to raise OPR

PETALING JAYA: Depositors will be getting higher returns for their savings as banks raise interest rates for fixed deposits (FD) in tandem with the rise in lending rates.

In a telephone survey, StarBiz found that most banking groups, with the exception of EON Capital Bhd, and Alliance Financial Group Bhd (AFG), had already increased their FD rates by about 0.25% yesterday.

Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd, RHB Capital Bhd and Affin Holdings Bhd have also upped their savings rates.

Kua Wei Jin says the FD will also go up when the Klibor or OPR increases
When contacted, EON Cap group CEO Michael Lor said the bank would be raising its base lending rate (BLR) and FD rate by 25 basis points soon.

“With the improving economy, we are confident that this latest rates rise would not affect our growth momentum. Also, Bank Ngeara’s disciplined approach on interest rates augurs well for the economy as a whole,” he added.

This is in response to Bank Negara’s move to lift the overnight policy rate (OPR) by 25 basis points last week.

An analyst with a local stockbroking firm said the rise in FD rates by about the same quantum as the BLR would result in generally, thinner margins for banks.

“This is a surprising move by the banks. Historically, the quantum of increase in FD rates is lower than the rise in BLR.

“The same quantum of increase could be due to the fact that deposit rates are still so low thus, making it affordable for banks to do so. This will also enable banks to attract more depositors and increase their deposit base in anticipation of higher loans growth as the economy improves,” she said.

In addition, the expectations of more OPR increases going forward would enable banks to boost margins further, the analyst said, adding that the recent 25-basis point increase in OPR was small.

TA Securities noted that although the rise in OPR would help boost banks’ net interest margin slightly – since the industry’s average lending rate had been hovering near its all time low of 4.83% – the impact would be minimal.

This is because competition in the industry is expected to intensify as banks aggressively look to grow their asset base.



In general, a rising interest rate environment will bode well for banks with a low exposure to fixed-rate loans and a low proportion of current accounts and saving accounts (CASA) and alternative deposits.

According to ECM Libra, among banking stocks, AFG would have the greatest potential for earnings accretion due to its high proportion of variable rate loans at 84% as well as high proportion of CASA at 37%.

“We believe key beneficiaries include AFG, CIMB, Maybank and RHB Capital due to a combination of high exposure to floating-rate loans (average around 70%) and large pool of CASA deposits (average around 30%),” TA said.

The Kuala Lumpur Interbank Offer Rates (Klibor), which serves as the benchmark rates for interbank lending and borrowing activities, has also increased by 20 to 25 basis points across the board since March 4.

Hong Leong Bank Bhd chief operating officer Kua Wei Jin said banks would have to borrow at higher rates from the interbank market if there was a hike in OPR.

“The FD, being one of the sources for banks to fund their loans, will also go up when the Klibor or OPR increases,” he said.

Nevertheless, Citibank Bhd consumer bank treasurer Lee Chet Leng noted that FD rates were not linked one-to-one to Klibor as they were often driven by different factors.

“FD rates are a reflection of market-based factors such as Klibor, the competitive and regulatory environment and the desire for banks to achieve a particular nature of funding mix,” Lee said.

The AmBank Group has revised the base lending rate (BLR) for AmBank (M) Bhd and the base financing rate (BFR) for AmIslamic Bank Bhd by 25 basis points respectively.

AmBank Group said in a press release that the BLR and BFR would be revised to 5.80% from 5.55% respectively effective yesterday.

EPF declares 5.65% payout after a sound performance

KUALA LUMPUR: The Employees Provident Fund (EPF) has declared a divide nd of 5.65% for the financial year ended Dec 31, 2009, an increase of 1.15 percentage points over the 4.50% paid out for 2008.

The dividend rate was declared on the back of the highest ever net income achieved of RM19.63bil, an increase of 34.82% from the RM14.56bil recorded in the previous year.

“2009 was a significant year for the EPF as it rode out the impact of the global financial crisis.

“While the EPF continues to be challenged by the fragile economic environment, our investments nonetheless delivered a sound performance for the year,” chairman Tan Sri Samsudin Osman said in a statement yesterday.

During the year under review, 72.53% of total invest ment was devoted to fixed income instruments in line with EPF’s prudent approach, while 27.05% was in equities and the remainder in property.

As of Dec 31, 2009, EPF’s investment portfolio grew 8.55% or RM29.25bil to RM371.26bil from RM342.01bil in 2008.

On prospects for next year, Samsudin said it would be “greatly dependent on the economic performance of the country and internationally.”

He said globally, financial markets continued to be volatile and this might have an impact on the price performance of EPF’s investments and future income.

“We will continue to focus on our key goals of preserving the capital of our contributors and ensuring a satisfactory real rate of return,” he added. — Bernama

Fuel prices set to rise

PETALING JAYA: The Government is likely to revert to slight increases in fuel prices over time now that it has been officially announced that the proposed two-tier fuel subsidy scheme based on vehicle engine capacity has been scrapped, analyst and economists say.

The proposed fuel subsidy scheme was originally set to be implemented on May 1.

Maybank Investment Bank analyst Mohd Khair Mirza said: “We may see an increase of about 10 sen in petrol prices post May 1.” He added that it was the only viable option for the moment unless the Government came out with a better fuel subsidy scheme.

Mohd Khair said the two-tier fuel subsidy scheme proposed in theory appeared good on paper but issues such as implementation and enforcement were questionable.

He said: “At least with the slight increase in fuel prices over time it is applied across the board and the Government is able to close the gap on the fuel subsidy which remains unsustainable.”

Mohd Khair said that based on US$80 per barrel of crude oil, the Government was currently subsidising fuel at the pump at around 40 sen per litre.

An economist from a rating agency said although the proposed two-tier fuel subsidy scheme has been scrapped, it should not deter the Government from continuing to look for other schemes that were more practical and viable.

He said a viable scheme should meet two objectives – ensure the hardcore poor are not badly affected and address the fuel subsidy.

A local economist from a broking house said the Government’s decision to scrap the proposed two-tier fuel subsidy scheme based on vehicle engine capacity came as no surprise.

“We figured it (scrapping of the scheme) would happen. There was a lot of talk that the subsidy scheme was not practical, despite a lot of effort by the Government to implement it,” he said.

The economist believed some individuals were waiting to exploit the scheme (if implemented) thinking they could benefit from the scheme.

“Thankfully the Government realised the proposed subsidy scheme was not foolproof and decided to scrap it,” he said.

Bank Negara ups interest rates

Overnight policy rate increased to 2.25%

PETALING JAYA: Bank Negara raised its overnight policy rate (OPR) by 25 basis points to 2.25% yesterday, signalling the time was ripe to normalise interest rates with the improvement in economic conditions.

The Monetary Policy Committee (MPC) said the hike was to prevent any financial imbalance that could take place should rates remain too low for longer than necessary and said Malaysians should expect the rate of inflation to rise but remain moderate given the prevailing economic conditions.

The hike in OPR, the benchmark interest rate which determines banks’ lending rates, is the first increase in close to four years.

“The recovery in the global economy is progressing amidst continued policy support and improvements in financial conditions,” the central bank said in a statement yesterday.

It said going forward, domestic growth was expected to strengthen further, supported by domestic demand and continued improvement in external demand, particularly from the regional economies which had expanded strongly in the fourth quarter.

Malaysia recorded its first growth of 4.5% after three consecutive quarters of contraction in the last quarter after a combination of government spending, a lower inflation rate and accommodative monetary policy helped boost domestic demand.

“Given this improved economic outlook, the MPC decided to adjust the OPR towards normalising monetary conditions and preventing the risks of financial imbalances that could undermine the economic recovery process,” it said.

While external factors, including rising global commodity and food prices might exert some additional upward pressure on domestic prices, inflation was expected to remain moderate this year, Bank Negara said.

Domestic consumer prices rose for a second month in January, up 1.3% year-on-year.

The OPR has remained at a historical low of 2% since February last year amid a severe and fundamental economic downturn. “These conditions no longer prevail,” Bank Negara said, adding that the stronger growth performance in the fourth quarter affirmed that the economic recovery was “firmly established”.

Accordingly, the floor and ceiling rates of the corridor for the OPR were raised to 2% and 2.5% respectively yesterday.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng described the hike both as a signal of the central bank’s confidence that the local economy recovery was on track and as a “gradual normalisation” of the historically low rates.

Bank Negara had earlier also indicated the need for the normalisation of rates, adding that any increase should be viewed as “normalisation” and not “tightening”, which is normally implemented to slow consumer demand in an overheated economy with high inflation.

According to Yeah, a “normal” level for the OPR is between 3.25% to 3.5%. He expects an increase of between 75 basis points to 100 basis points this year backed by improving economic conditions.

AmResearch Sdn Bhd senior economist Manokaran Mottain said the increase was within AmResearch’s expectations and believed that given increasing inflationary pressures, there would be at least another increase of 25 basis points this year.

“It is needed for a gradual move towards the normalisation of rates,” he said.

At the new OPR level, the stance of monetary policy continued to remain accommodative and supportive of economic growth, said Bank Negara yesterday.