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OPR hike mainly to curb asset bubble

May 11th, 2011 Leave a comment

KUALA LUMPUR: The recent 25 basis points (bps) hike of the overnight policy rate (OPR) to 3% from 2.75%, effective since July last year, is mainly due to concerns about asset bubble rather than inflationary pressures, said Dr Yeah Kim Leng, chief economist of RAM Holdings Bhd.

“If we look at the core CPI (consumer price index) growth, which is slightly above 2%, it is still manageable,” said Yeah, indicating that the current level of inflation is still under control and could be absorbed by consumers. Inflation in Malaysia rose to 3% in March from a year ago on higher food and fuel prices. He said the 3% inflation rate recorded in March was in line with the country’s long-term level, which has been sustained over the last three decades.

Curbing inflation was one of the reasons for the increase in the OPR and statutory reserve requirement (SRR) by Bank Negara Malaysia (BNM) last week.

Yeah told The Edge Financial Daily on the sidelines of RAM Holdings Bhd’s annual general meeting on Monday, May 9 that asset prices had been increasing lately, especially in the high-end property sector in cities such as Kuala Lumpur and Penang as a result of ample liquidity, low interest rates and inflationary expectations as investors looked to investing in property as a hedge against inflation.

“That is why BNM did not only raise the OPR, but the SRR as well, as it wants to reduce liquidity and curb excessive lending,” he explained.

However, Yeah said the emerging asset bubble was segmented, based on the location and type of property. In this case, high-end properties are seen to be in demand as they are the targets for speculation.

According to Yeah, if it is left unchecked, the situation will create a ripple effect that will also inflate prices of property which are farther away from the city centre areas.

“The rising prices of high-end properties have also lifted the prices of lower- to mid-range properties, especially within urban areas,” he said.

Yeah noted that property bubbles are normally fuelled by easy credit. By increasing the OPR and SRR, the central bank will tighten lending and the supply of easy money. Speculative pressure would also eventually decrease due to the tightening measures, added Yeah.

On inflationary pressures, the economist noted that for a country which has successfully maintained relatively high annual growth rates of between 5% and 6%, inflation is still manageable and under control.

“They (inflationary pressures) will gradually raise prices, but even if the inflation rate reaches 3.5%, it would still be manageable because if we look at 2008, just before the global financial crisis, we had a CPI rising up to close to 5%. We are not likely to revisit those high-inflation levels,” Yeah explained.

He expected inflation to be moderate throughout the year, with an inflation rate of 3% to 3.3%.

Source: TheEdgeProperty

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