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Thursday, July 17, 2014

EVERYTHING TO COST MORE FROM NOW! Get ready for the impact from interest rate hike

EVERYTHING TO COST MORE FROM NOW! Get ready for the impact from interest rate hike
Bank Negara raised the benchmark overnight policy rate (OPR) by 25 basis points (bps), or 0.25%, to 3.25% on last Thursday. It was the first interest rate hike in three years. The move was meant to reduce the risk of economic and financial imbalances to curb rising household debt. The last interest rate hike was made in mid-2011. The hike this time was within most economists’ expectations and thus, it is expected to have not much impact to the market and economy.
As for whether it would be the only hike this year, some predicted that there would be another one or two hikes in the second half of the year in the effort of normalising interest rate. However, some economists also believe that Bank Negara would suspend hike after this until clearer economic signals are detected.
The hike decision this time has its theoretical needs. The expansion of global economic activities, the improving external environment and the exports and private sector activities which have been continuously strengthening have led to an expectation of growing momentum.
It cannot be ignored that since Malaysia's household debt has achieved 86%, the second highest in Asia, Bank Negara thus signalled to the market by raising interest rate to slow the growth of household debt rate. Combating speculative activities in the market and reducing the imbalances in asset prices are also the objectives of Bank Negara. The hike could reduce excessive borrowing.
In addition, since the Goods and Services Tax (GST) is scheduled to be implemented next year, Bank Negara must also get prepared for possible inflation. Therefore, after enjoying low interest rate for a long period of time, we should get prepared for the impacts brought by interest rate hike.
As expected, banks have raised the Base Lending Rate (BLR) and Base Financing Rate (BFR) after the interest rate hike. The 0.25% hike of BLR will make housing instalments to increase by about 3% and it is the greatest concern of the public. The people's housing affordability would decrease. It is expected that the market trend of loan applications would gradually slow down from increasing in early this year.
The GST would also affect property prices. House prices would rise next year and the increase rate would be higher than the one of interest rate. Although it would not affect purchasers' mood in short term, if the interest rate continues to increase, people who are interested in buying properties might take a wait and observe attitude. After all, the increase in instalments is a long-term matter. Of course, if they buy houses to make homes, as long as the prices are affordable, the impact would be relatively small.
As for businesses, financing interest rate hike will increase operating costs. Together with the impacts from minimum wage and the retirement age of 60 years, it is a heavy year for business operators. The GST to be implemented next year would be another blow. In particular, the SMEs must adjust their modes of operation to offset the impacts of rising costs through product and services value-adding efforts.
The interest rate hike helps in curbing excessive borrowing and speculative activities, but it would at the same time affect domestic demand. Anyway, through effective macroeconomic regulations, it is believed that the level of inflation is controllable while economic growth is ensured. -Mysinchew

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