January 25, 2018 / 8:08 AM / 3 months ago

Malaysia's central bank taps the brakes, raises key rate

KUALA LUMPUR (Reuters) - Malaysia’s central bank on Thursday became the first in Southeast Asia to raise a key interest rate in years, moving to tap the brakes and “normalize” policy well before national elections and at a time of robust growth.

A general view of the Bank Negara Malaysia in Kuala Lumpur, Malaysia, March 8, 2016. REUTERS/Olivia Harris

But economists strongly doubt the hike will be followed by another anytime soon.

“We suspect this will be a case of one and done,” Capital Economics said, asserting that growth is set to slow and inflation is benign.

Bank Negara Malaysia (BNM) raised its overnight policy rate (OPR) MYINTR=ECI by 25 basis points to 3.25 percent, saying its monetary policy committee “decided to normalize the degree of monetary accommodation” as the economy remains firmly on a steady growth path.

The hike was its first since July 2014, and the first change in rates since July 2016, when there was a 25 basis point cut.

BNM said it “recognizes the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time”.

After the hike, monetary policy “remains accommodative,” the central bank said.

A slim majority of economists polled by Reuters predicted that the central bank would raise its key rate. Some said that Malaysia was due for a hike, and authorities would prefer to make it well ahead of national polls that must be held by August.

The election will be a bitter fight between Prime Minister Najib Razak and Mahathir Mohamad, his one-time mentor and a former premier.

The central bank has “done a good job of getting this out of the way for now,” said Charu Chanana, an economist in Singapore with Continuum Economics.

She said a second hike won’t be needed “unless growth overshoots the target”.

Malaysia hasn’t yet reported fourth-quarter economic growth. It said the third-quarter’s annual rate was 6.2 percent, the highest in more than three years.

INFLATION TRAJECTORY

Full-year inflation for 2017 came in at 3.7 percent, near the top of Malaysia’s 3-4 percent target range.

BNM said inflation is expected to be lower in 2018, for which the government has a 2.5-3.5 percent target.

However, it cautioned that the trajectory of headline inflation hinges on global oil prices, which “remain highly uncertain”.

A spike in crude prices will exert cost-driven pressure on inflation, said UOB Bank economist Julia Goh, but the effects would be cushioned by the strengthening ringgit currency MYR=.

“A stronger ringgit will help mitigate some of the pressure,” said Goh, who also expects Thursday’s hike to be the only one for 2018.

Malaysia became the first Asian nation to hike rates in 2018, during which the Federal Reserve is expected to increase U.S. ones multiple times, as it did in 2017.

South Korea raised its rates on Nov. 30. The Philippines, which last hiked in September 2014, is expected by many economists to have at least one this year to cool its fast-growing economy.

BNM said the ringgit MYR= has strengthened to better reflect Malaysia's economic fundamentals. The currency gained nearly 11 percent against the dollar in 2017, and has strengthened about 3.5 percent in January.

Editing by Richard Borsuk

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