MNI STATE OF PLAY: Malaysia Moves Early With Rate Hike

Malaysia’s central bank on Wednesday opted for a pre-emptive move in raising interest rates as it begins to normalise monetary policy, becoming the first Southeast Asian emerging market central bank to tighten this cycle.

The domestic economy is on a firmer footing after the pandemic but inflation is still benign and the ringgit stable, so it was something of a surprise when Bank Negara Malaysia raised the Overnight Policy Rate from the record low of 1.75% to 2.0%. The last move in rates was a cut in July 2020, See: MNI BRIEF: Malaysian CB Surprises with 25bps Rate Hike.

BNM Governor Nor Shamsiah Mohamad Yunus recently signaled that policy settings would tighten soon, when she the bank was “mindful” of the consequences of an extended period of low rates, saying it could “lead to an unhealthy build-up in financial imbalances.” A rise had been expected in the second half of the year.

CONDITIONS CHANGE

In Wednesday's statement, BNM said that with growth on a “firmer footing,” the “unprecedented conditions” which saw rates cut to historic lows had abated and the bank would now reduce monetary accommodation “in a measured and gradual manner.”

The BNM statement suggested that external conditions had played a role in today’s decision, citing rate rises in the US and inflationary pressure from rising commodity prices and strained supply chains.

“Consequently, several central banks are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures,” the statement said.

RETURN TO GROWTH

Malaysia’s economy has returned to growth and while inflation was above the central bank’s 2% to 3% target range earlier in the year it has since come back, and printed at 2.2% in March although food inflation was at 4%.

The economy is also expected to be a net beneficiary from rising commodity prices, with Malaysia a significant exporter of natural gas and palm oil. The governor recently said that exporters would improve by 10.9% this year.

The global uncertainty from the Ukraine has trimmed growth forecasts, however, with BNM now forecasting 2022 growth at 5.3% to 6.3% against the previous estimate of 5.5% to 6.55%. GDP data for the first quarter will be released on Friday.

The rates decision had little impact on the ringgit, which is trading at 4.38 against the US dollar after declining from 4.18 at the beginning of the year.