Malaysia raises key interest rate for first time since 2014

Bank Negara Malaysia increased the overnight policy rate to 3.25 per cent from 3 per cent, the central bank announced on Jan 25, 2018. PHOTO: THE STAR/ASIA NEWS NETWORK

KUALA LUMPUR (BLOOMBERG)- Malaysia's central bank raised its benchmark interest rate for the first time in more than three years, becoming the first in South-east Asia to tighten monetary policy after years of low rates.

Bank Negara Malaysia increased the overnight policy rate to 3.25 per cent from 3 per cent, it said in a statement in Kuala Lumpur on Thursday (Jan 25), as predicted by 16 of the 20 economists in a Bloomberg survey.

The central bank followed through on its plans after signalling in November that it may adjust its stance given the strength of the economy. The government is forecasting growth of as much as 5.5 per cent this year, buoyed by a global trade recovery and rising domestic spending. Inflation pressures are also building because of rising fuel and food costs.

"With the economy firmly on a steady growth path, the Monetary Policy Committee decided to normalise the degree of monetary accommodation," the central bank said in the statement. Officials are acting preemptively to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time, it said.

The early rate move by the central bank removes some of the uncertainty created by the timing of the general election. Some economists had predicted policymakers would delay any tightening until after the vote, which must be held by August.

Inflation is expected to average lower in 2018 from 3.7 per cent last year, the central bank said, as a stronger ringgit makes imports cheaper. Domestic financial markets have been resilient and the ringgit has strengthened to better reflect the economic fundamentals, it said.

The ringgit extended gains after the rate decision, reaching 3.8885 per US dollar, the highest since April 2016. The currency has strengthened almost 4 per cent this year, the biggest gain in Asia. Government bonds and the benchmark stock index were little changed.

Consumer prices rose 3.5 per cent in December from a year ago, while the government forecasts inflation will average 2.5 per cent to 3.5 per cent this year.

Strong growth elsewhere in South-east Asia is also fuelling calls for tighter monetary policy, with some economists forecasting the Philippine central bank will raise interest rates as early as the first quarter.

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