10 July 2014

Bank Negara to Increase Interest Rate Soon? - July 2014

Malaysia Ringgit has been strengthened recently due to the rumor that Bank Negara would increase the interest rate for at least 0.25% in their upcoming meeting this month. I also learnt that the SGD:RM exchange rate is around 2.56x at The Arcade at Raffles Place (drop from the peak of more than 2.60 few months ago). It seems that there are speculators trying to buy more RM before the interest rate is raised up by Bank Negara. 

The key argument is that the family debt ratio in Malaysia is now at 88%. It indicates that the family can barely support their daily expenses after deducting all the loan payment from their disposable income. Although Malaysian could use their EPF money (similar to CPF) to settle the mortgage loan payment, but the percentage of EPF could be used to settle mortgage loan is only around 30%. Nonetheless, the most important reason is that the pace of increment of the income is much slower than the rising rate of the real estate, especially after the hot money flow into emerging market after the US started the tapering programme since few years back. It is arguable that the asset price has been increased so fast due to two main reasons:
  • It was easier to get the loan as hot money is flowing into the market
  • It was easier to get bigger loan amount due to low interest environment. The bigger loan they can get, the demand for asset class would increase and drive up the price 
Most of the countries are maintaining the interest rates at record low level to keep their exports strong enough to boost up the economy. However, it also created a similar property bubble in Asean market. It is getting harder for people, especially for those young graduates to own a piece of home as they could not afford the current property price. For example, a property sold during year 2009 could easily rise 50% - 100% in resale market, which translates into nearly double digit compound annual growth rate (At the same time the saving rate is lower than inflation rate, hence it is harder for retirees to just rely on the interest rate to support their daily activities). 

Bank Negara Malaysia was the first to increase the interest rate back to year 2011. Since then, it has not increased the interest rate. There are some discussions on how to resolve the high debt level, one of the methods is to increase the interest rate and it would reduce the maximum number of borrowings the investors could take in, and indirectly cool down the property price in the market. 

However, I personally believe that Malaysia government has done something on it. First of all, it cut down the subsidies in petrol, sugar as well as electricity. It is expected to introduce GST next year (year 2015). Many businesses are expected to be in tougher time starting next year, as they have no choice but to absorb certain amount before passing the inflation pressure to the end customers. 

So, let's see whether Bank Negara would increase the interest rate this month, and how would the Rakyat react on this. 


  1. Yeah, most likely to increase the rate soon. But if Im not mistaken, for now Hong Leong Bank still offers at 4.45% interest rate. If you want to find out more about it, check out this: http://www.imoney.my/home-loan/hong-leong


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