Tuesday, October 19, 2010

MIER Forecasts 50bp Rise In The OPR For 2011

The Malaysian Institute of Economic Research (MIER) is one of the oldest independent think tanks in Malaysia, and publishes a quarterly economic outlook as well as Business Conditions and Consumer Sentiment Surveys. Their latest economic outlook forecasts one or more interest rate hikes next year (summary):

MEO 3Q 2010 Executive Summary

...MIER maintains 2010 and 2011 economic growth of 6.5% and 5.2%, respectively. Importantly, these forecasts are also supported by recent in-house surveys. The Business Conditions Index (BCI) fell sharply to 104.9 pts in 3Q10, which more than offsets the surge in the Consumer Sentiment Index (CSI) to 115.8 pts. Other indices also painted a similar gloomy environment ahead.

In terms of interest rates, MIER anticipates the OPR to be kept at 2.75% until end-2010. This is useful in order to assess the effects of previous rate hikes and the possible impact from economic fallout in the Eurozone. The OPR will trend higher to 3.25% in 2011, in tandem with a higher overall CPI forecast of 2.5% yoy (2.2% in 2010).

I’m not sure I’d be brave enough to stick my neck out for this one, as BNM is notoriously unmoved by supply-side driven inflation. The last time BNM hiked rates, in 2005-2006, it was in response to capital inflows arising from the abolishment of the USD peg. With growth expected to slow, we’re obviously not talking about a demand-side driven increase in the price level, nor is the economy yet showing any signs of fully closing the output gap.

The only real argument for further monetary tightening would be due to the continuing influx of foreign portfolio capital, but that I think is more likely to attract administrative measures (aka capital controls) rather than a broad-based increase in the price of borrowing.


  1. Richard, I ain't smart - if I was I wouldn't be putting myself up as a target by blogging :)