Malaysia: Rate hikes to affect personal consumption growth

PETALING JAYA: Personal consumption growth, an important indicator of the strength of the economy, may slow down this year with more interest rate hikes in the offing.

Bank Negara had raised its overnight policy rate (OPR) by 100 basis points (bps) last year to 2.75% in a bid to tame inflationary pressures and in line with other global central banks.

Economists expect rate hikes of 50 bps for the year, depending on the state of the economy and the rate of inflation.

Some of them expect the benchmark interest rate to revert to pre-Covid-19 pandemic levels of 3% to 3.25% by this year.

Based on official estimates, gross domestic product (GDP) is forecast to grow by 4% to 5% this year.

TA Research said the OPR could see an additional boost of 50 bps from the central bank this year and it might affect the personal consumption performance this year.

Bank Negara is expected to issue its first OPR announcement on Jan 19.

For October to November 2022 period, the Distributive Trade Index (DTI) rose by an average of 10% compared with a 25.9% year-on-year (y-o-y) gain recorded in the third quarter. This indicated a moderate performance of the fourth quarter of last year’s private consumption expenditure (PCE) in real GDP as the DTI and PCE correlate by more than 95%, the research house said.

Malaysia’s DTI rose by 9.7% y-o-y in November, albeit moderated from the double-digit growth of 10.3% y-o-y previously.

On a month-on-month (m-o-m) basis, the DTI was barely unchanged from 145.7 points in October 2022.

At the same time, Distributive Trade Sales expanded at a moderate pace by 13.9% y-o-y (0.2% m-o-m) to RM133.91bil in November 2022, compared with 14.9% annual gain in the prior month.

The annual increase in DTI was supported by the gain in all segments, namely, retail trade, motor vehicles and wholesale trade.

For the 11 months of 2022, the DTI rose by an average of 14.7% y-o-y, underpinned by a resilient performance of all sectors.

Retail spending expanded immensely by 19.3% y-o-y, wholesale trade was up by 3.9% y-o-y and motor vehicles rose 43.8% y-o-y.

Nonetheless, the three-month moving average of the distributive trade increased by 18.6% y-o-y in October, compared with 26.3% y-o-y previously.