KUALA LUMPUR - Bank Negara is expected to revise its overnight policy rate (OPR) upwards by 25 basis points to 3.25 per cent in the second quarter of 2014 due to inflationary pressure, according to United Overseas Bank (UOB).
It said the rate would remain at the level until year-end. Malaysia's OPR has been maintained at 3 per cent since May 2011.
"Subsidies rationalisation would give inflationary pressure but a 25 bps hike in OPR is not significant tightening in monetary policy," said UOB Group senior economist Alvin Liew at a media briefing on the 2014 Economic Outlook yesterday.
"In Asia's context, a low interest rate environment and strong liquidity flow into the region are the keys that cause asset inflation including the property market, and we have seen a lot of prudent measures taken to deal with it," he added.
In Malaysia, Liew said the move to raise the real property gains tax (RPGT) and the banning of the developer interest bearing scheme would help to keep property prices in check.
"This may have a temporary impact on property demand but it would ensure sustainable growth in the long term by deterring speculators and preventing a bubble," he said.
Malaysia's inflation is projected to reach at about 2.9 per cent in 2014 compared with 2.1 per cent estimated for this year.
Nonetheless, Liew expects the implementation of tax reforms, subsidy rationalisation and other initiatives to help bring higher revenue, reduce gross development spending and contain the fiscal deficit at 3.5 per cent of gross domestic product (GDP).
He said countries that have a poorer fiscal position and facing a current account deficit would experience higher volatility in their currency as compared with their peers.
"The quantitative easing tapering would likely to happen in first half of 2014 and potential liquidity outflow from Asia remain a concern next year.
"As a result, we expect a broadly higher US dollar against Asian currencies next year," he said. Liew sees the ringgit to hit 3.30 against the greenback by the end of the second quarter of 2014. He forecast Malaysia's GDP growth at 5.2 per cent in 2014, supported by the global economy recovery leading to a rebound in exports and resilient domestic demand led by private investment.
"The US, Europe and Japan will continue to see economic improvement in 2014 and the strengthening of the US dollar would benefit export-oriented countries in the region," he said in a statement.
He added the Asia would continue to attract foreign direct investment moving forward, especially from the Trans-Pacific Partnership Agreement (TPP), a free trade agreement which is being negotiated in Singapore between Australia, New Zealand, the US, Peru, Chile, Mexico, Canada, Singapore, Brunei, Malaysia, Vietnam and Japan.