Malaysia raised its key interest rate for the first time in more than three years after economic growth quickened and as the central bank seeks to curb the risk of financial imbalances.
Bank Negara Malaysia increased the overnight policy rate by 25 basis points to 3.25 percent, it said in Kuala Lumpur yesterday. The decision was predicted by 15 of 21 economists surveyed by Bloomberg News, while six forecast no change. Future moves will depend on the balance of risks for growth and inflation, it said in a statement after the decision.
Malaysia is the first in Southeast Asia to raise its benchmark rate this year, underscoring policy makers’ confidence in the nation’s economic growth as exports and domestic demand recover. The central bank has said a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources, as it signaled a readiness to raise borrowing costs to minimize such threats.
“Recent economic data has been strong, which suggests the economy is healthy enough to withstand a tightening in monetary policy,” said Krystal Tan, a Singapore-based analyst at Capital Economics Ltd. “We see scope for another increase by the end of the year.”
The ringgit dropped 0.3 percent to 3.1855 per dollar as of 10:38 a.m. in Kuala Lumpur, the biggest decline in two weeks, according to data compiled by Bloomberg. It gained 0.8 percent in July, the best performance among 24 emerging-market currencies tracked by Bloomberg after Indonesia’s rupiah and the Colombian peso. One-year interest-rate swaps held at 3.69 percent, the highest level since September 2008.
“They seem to be declaring victory that the economy’s doing fine and they can dial back the accommodation,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “But there’s no need to move into a tightening mode and that seems to be the message.”
In its statement, the central bank cited “firm growth prospects” and “inflation remaining above its long-run average” as factors behind the decision to raise the rate.
Consumer prices rose 3.2 percent in May from a year earlier, slowing from 3.5 percent in March and February that was the fastest pace since 2011. The central bank forecasts price gains of 3 percent to 4 percent in 2014. June data are due on July 16.
“This normalization of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy,” the central bank said. “Further review of the degree of monetary accommodation will depend on the Monetary Policy Committee’s assessment of the balance of risks surrounding the outlook for domestic growth and inflation.”
Goldman Sachs Group Inc. predicts Bank Negara will deliver another 25 basis point increase in the benchmark rate by year-end as strengthening global growth boosts Malaysian exports, Hong Kong-based analyst Jonathan Sequeira wrote in a research note yesterday.
Inflation will probably accelerate somewhat next year as a result of tax increases and then moderate to about 3 percent in 2016, Governor Zeti Akhtar Aziz said in April.
Gross domestic product growth this year may be at the upper end of a 4.5 percent to 5.5 percent range, Deputy Governor Sukhdave Singh said last month. The economy grew 4.7 percent last year. The benchmark FTSE Bursa Malaysia KLCI Index of shares fell 0.3 percent today to 1,886.55, shy of the record 1,896.23 on July 8.
Barclays Plc is maintaining its projection for another increase in September, while Bank of America Corp. says that is more likely to happen in November. Credit Suisse Group AG predicts the central bank will pause for now and raise rates again once more in the first half of 2015.
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