Malaysia Raises Main Interest Rate a Third Time in `Vote of Confidence'
Prime Minister Najib Razak said this week “external factors” may hurt growth in the Southeast Asian nation in the second half of 2010. Photographer: Goh Seng Chong/Bloomberg
Malaysia’s central bank raised interest rates for the third time this year, judging the economy is strong enough to withstand higher borrowing costs even as threats to the global rebound grow.
Bank Negara Malaysia increased its overnight policy rate to 2.75 percent from 2.5 percent yesterday, calling the new level “appropriate.” The monetary stance remains “supportive” of the economy, the bank said.
Malaysia was the first in the region to boost borrowing costs this year, and has moved more times than any neighbor except India, helping make the ringgit the biggest gainer in Asia. South Korea today joined Malaysia along with India and Taiwan in raising rates in recent weeks, a step not yet taken by Indonesia, China and the Philippines as Asian policy makers juggle between containing inflation and protecting growth.
“By starting early, Bank Negara has earned itself the flexibility to maneuver monetary policy and can amend its tightening strategy if external conditions do deteriorate significantly,” said Ashira Perera, an economist at Capital Economics Ltd. in London, who expects one more increase in 2010. “It is a vote of confidence in the local economic upswing and its likely resilience.”
The ringgit headed for a second weekly advance, gaining 0.2 percent to 3.1975 per dollar as of 9:50 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. It has climbed 0.9 percent this week.
‘Robust’ Economy
Malaysia’s economy was “robust” in the second quarter, the central bank said. “Going forward, while external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvements in private consumption and investment, and augmented by public investment spending,” it said.
The Southeast Asian nation’s move comes after the Reserve Bank of India last week increased its key rates for the third time since mid-March. Taiwan’s central bank raised its benchmark in June, citing an improved economy.
The Bank of Korea today raised the benchmark seven-day repurchase rate to 2.25 percent from a record-low 2 percent, the first increase since the global financial crisis.
Policy makers in Indonesia and the Philippines have kept borrowing costs unchanged. The Bank of Thailand may raise rates at its July 14 meeting, a separate survey showed.
Government Austerity
Government austerity measures to cut debt in advanced economies are hurting consumer and business confidence, and about $7 trillion has been wiped from equities worldwide since this year’s high on April 15.
The International Monetary Fund this week highlighted risks to the world recovery posed by financial market turmoil and Europe’s sovereign-debt crisis, even as it raised its forecast for global growth this year.
“Asia has only limited direct financial linkages to the most vulnerable euro area economies, but a stall in the European recovery that spilled over to global growth would affect Asia,” the IMF said. “Many regional economies also have room for further policy maneuver and could delay the planned withdrawal of monetary and fiscal stimulus in order to mitigate adverse spillovers to the real economy.”
The Washington-based lender predicts Malaysia’s economy will expand 6.7 percent this year and 5.3 percent in 2011. Gross domestic product increased 10.1 percent in the three months ended March 31 from a year earlier, the most in a decade.
Faster Production
Malaysia’s industrial production rose at a faster pace in May, the statistics department said yesterday, supporting the economy’s recovery even as Prime Minister Najib Razak said this week “external factors” may hurt growth in the Southeast Asian nation in the second half of 2010.
Exports by companies such as Sime Darby Bhd. and Unisem (M) Bhd. rose at the slowest pace in three months in May as sales to Europe and China eased.
“There are good things happening in Malaysia’s economy and the rate decision is appropriate,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “Given that we see the economy slowing down in the second half because of the external environment, we expect the central bank to keep rates unchanged for the rest of the year.”
Malaysia’s consumer prices rose 1.6 percent in May from a year earlier, the biggest increase in a year. Inflation is forecast to average 2 percent to 2.5 percent in 2010, accelerating from 0.6 percent in 2009, the central bank estimates.
Prices are expected to rise at a “gradual pace” in the coming months as the domestic economy improves, and inflation will remain moderate going into 2011, the central bank said.
Malaysia’s rate increase in March was the first in almost four years. The overnight policy rate was kept at 3.5 percent from late April 2006 until late November 2008, when the central bank started to cut the benchmark, bringing it to a record-low 2 percent in February 2009.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
Rate These Stories
Rate this Page