Bank Negara’s move to let rates rise, when it may encourage more money to flow in and economic recovery is nascent, puzzles

IT’S easy to understand why Bank Negara raised the amount of interest-free deposits (SRR – statutory reserve requirements) that had to be kept with it by banks by another percentage point to 3% of total deposits. It is to mop up excessive inflows of money.

But it is puzzling why it decided to simultaneously increase the overnight policy rate or OPR, a gauge of the interest rates the central bank offers or pays when intervening on the money markets, by a further 0.25 percentage point to 3%.

This not only results in an across-the-board increase in the cost of doing business by an automatic increase in the base lending rate (BLR – the reference rate to which most lending rates are pegged), it also attracts further inflows of funds to take advantage of the increased interest rates.

Banks have already raised their BLR by 0.3 percentage point to 6.6% and their deposit rates by a similar amount.

The SRR basically restricts the availability of liquidity by tying up funds so that they remain with Bank Negara. This in turn restricts the ability of banks to lend money, helping to ensure that inflows of money don’t find their way into the system.

Bank Negara takes pains to explain that the change in SRR does not reflect a change in monetary stance and is simply a tool to manage liquidity. It adds that the OPR is the sole indicator used to signal the stance of monetary policy.

The simplest way to interpret the latest move then is that Bank Negara feels that there is some amount of excessive demand and this needs to be cooled down. But how can that be so when the overall economy is by some indications growing by less than 5%.

It would be imprudent to raise interest rates and raise costs for all sectors when say, only the property sector, and that too in only some areas, needs cooling off. This has already been dealt with via administrative measures such as 70% financing for those who already have more than two houses.

Perhaps, the central bank is concerned about inflation. Sure, everyone is. But most of this is caused by rising prices of inputs, especially of oil and commodities, rather than sharply increased demand. Raising rates won’t solve the problem but may curtail economic activity when more of it is sorely needed.

The last reason could be to help depositors get a real rate of return so as to encourage savings. But again, the idea is to get spending up which means one would want to discourage savings right now, especially with so much liquidity sloshing around the place.

One can only speculate about Bank Negara’s reasons for letting interest rates rise, especially since rising domestic interest rates and when US interest rates stay low and close to zero, will attract further inflows of hot money and make liquidity management more difficult.

Since the beginning of last year, the OPR has been increased four times, each time by 0.25 percentage point, to make in all a full-percentage-point rise in the OPR. The BLR would have mirrored largely this rise in OPR too.

If you were paying 5% a year for your housing loan a year ago, for instance, it would mean a significant 20% increase in interest costs. And that applies to businesses too.

Still, the OPR is a half a percentage point below what it was before the onset of the world financial crisis in 2008. From that vantage point, Bank Negara’s rate increase still seems within reasonable limits.

But it has to beware of further interest rate hikes during a period when both confidence as well as economic activity is still not strong, especially when a situation of easy liquidity warrants a lower – not higher – interest rate.

By all means, raise the SRR to rein in liquidity, but be more careful about increasing interest rates – there are many downside perils.

SOURCE: The Star

YESTERDAY, Housing and Local Government Minister Datuk Chor Chee Heung said the Government is monitoring the spike in house prices. He went on to say that it will not hesitate to implement measures to keep them under control. This is probably the first time the housing minister has come outright to state a fact that has been staring in our faces the last 18 months or more, particularly for landed units in the Klang Valley, Johor Baru and Penang.

Nevertheless, although the housing ministry has been relatively sanguine about it, Bank Negara has not. Last November, the central bank put in place a requirement for buyers of third and subsequent properties to have a 30% downpayment. Real estate personnel say buyers will adjust to this requirement in due time.

Early this week, Bank Negara raised the overnight policy rate which effectively led to banks raising lending rates by 30 basis points. This effectively will result in banks revising their lending, and deposit rates. Two banking groups have raised their base lending rates and base financing rates by 30 basis points to 6.6% respectively. These rates would affect lending rates of property, automobile and hire-purchase loans, among others.

So far, these are the only two measures that will affect the housing market. While the 30% downpayment was implemented to curb property speculation, the recent rise in interest rates will affect a whole gamut of things over and above more than just housing and the way people are buying into the property market. The raise in interest rates will affect the cost of doing business, among other things.

Housing is a very basic need. It is a terrible thing for a young person – or even an older one – to have to fork out rental every month, at the end of which, the house does not belong to him, but to the landlord. A tenant is effectively is helping the landlord to finance his housing mortgage. This does not mean investing in property is immoral or unethical. It is wise to invest, and that’s a different issue.

With the way house prices are going up, and the way our salaries are not, and the rate of inflation today, those who do not have a property to their name, are not in an enviable position. They are being pressured on several fronts or more – the negative effects of inflation on their earnings and savings, their continual need to rent and their continual depleting purchasing power.

In the story on public housing policies undertaken by China (see story below), the Chinese government is pressing developers to go into social housing because this basic social need can turn political. It can be used by ruling and opposition parties.

It is difficult to govern a country of 1.3 billion people. Although they are all Chinese, the Chinese population come from diverse minority groups with different religions, beliefs and communication. That is why the Chinese government uses putong hua – or Mandarin, a single common language – to unite the people. China looks at social issues very carefully.

Malaysia has a population of about 28 million. It must look at social issues like housing because we have a young and diverse population.

Although Malaysia has, and plan to, improve its social housing for the masses to include My First Home for first time house buyers, this scheme is only a part of the whole affordable housing scheme conundrum that is currently bedevilling this nation. There is also the low-cost housing scheme, which is also a segment of the affordable housing scheme plan. Low-cost housing schemes must also be improved as urban slum is another social problem.

There is a need for the Government to come right out with the logistics, location, pricing and its implementation to ensure the public that there is action behind the words. And to do it soon. Very soon.

While affordable housing is being planned – and hopefully implemented – real estate professionals are also calling for measures directed at the housing market in the form of reintroducing the real property gains tax on a sliding scale, requiring sellers to pay a stamp duty and not just the buyers and extending that 30% requirement to include the purchase of a second house, instead of the current ruling for the third and subsequent purchase. These measures, unlike the rising of interest rates, would directly affect housing and the speculative nature of this industry.

SOURCE: The Star

Taman Indah, strategically located within the established township of Bukit Tengah in Bukit Mertajam, Penang. An easy access to North-Sourth Expressway, Perai Industrial Area, Butterworth, Bukit Mertajam and a mere minutes drive to Penang bridge.

This residential property development comprises:

2-Storey Terrace
Unit: 10
Built Size: 20′ x 43′
Lot Size: 20′ x 70′ onwards

2-Storey Semi-D
Unit: 16
Built Size: 25′ x 46′
Lot Size: 35′ x 73′ onwards

3-Storey Link Semi-D
Unit: 28
Built Size: 26′ x 45′
Lot Size: 33′ x 66′ onwards

2-Storey Bungalow
Unit: 2
Built Size: 46′ x 44′
Lot Size: 63′ x 72′ onwards

Property Project : Taman Indah
Location : Bukit Tengah, Penang
Property Type : 2-Storey Terrace, 2-Storey Semi-D & Bungalow
Tenure : Freehold
Developer : Airmas Group

Vista Tecoma is the latest addition to Setia Vista in Relau. This new development comprises 10 units of 2-storey semi-detached houses.

Property Project : Vista Tecoma @ Setia Vista
Location : Setia Vista, Relau, Penang
Property Type : 2-storey Semi-Detached
Land Area: 35′ x 80′ ft.
Built-up: 2,700 sq.ft.
Total Units : 10
Indicative Price : RM1,300,000 onwards
Developer : SP Setia

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