Loan growth for May was higher despite Bank Negara's 25 basis-point rate hike in the overnight policy rate to 3% earlier in the month under review as demand was sustained from the household and business sectors.
CIMB Investment Bank Bhd head of economics Lee Heng Guie said in a July 1 report that all loan indicators showed improvement and liquidity conditions remained ample.
However, he expects the central bank to make a careful assessment whether the slowing growth was transitory or “of a more fundamental nature” at the coming monetary policy committee meeting on July 7.
This was because compared to May, the confluences of external headwinds had tilted the balance of risk towards the downside for the growth outlook, Lee said.
Recent data suggests that much of the headwinds was contributed by the supply chain disruption following the Fukushima disaster, slowing growth momentum in the United States and China as well as worries over the euro-zone debt crisis.
“As such, this necessitates a careful assessment whether the current soft patch will be short-lived or prolonged before making a move on interest rates,” Lee said.
He said the banking system remained flushed with liquidity due to the sustained trade surplus and private capital inflows, which were predominantly short-term flows in recent months.
Lee said that up to mid-June this year, the amount of excess liquidity mopped up by the central bank via a 200 basis-point hike in the statutory reserve requirement (SRR) in April and May to 3%, amounted to RM281.8bil.
“While we maintain our expectations that Bank Negara will raise interest rates by 25 basis points to 3.25% in the third quarter, the timing will be a close call between July and September,” he said.
Lee expects another 100 basis-point hike in the SRR this month.
Bank Negara's monetary and financial developments released last week showed overall loan growth edged higher to 13.8% in May from a year ago versus 13.5% in April supported by sustained demand from the household and business sectors while loan applications and approvals rose by 27% and 26.9% respectively.
Money supply growth accelerated by 11.1% in May versus 10.1% in the previous month due to higher trade inflows and credit expansion.