KUALA LUMPUR, Malaysia--Malaysia's central bank raised interest rates for the first time in 3 1/2 years Thursday, joining a global trend toward tighter monetary policy.
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The bank raised its overnight policy rate by a quarter of a percentage point to 3.25%.
The move was largely expected, following guidance by Bank Negara Malaysia at its previous meeting when it said that improving economic conditions warranted a review of its policy.
Nine of 13 economists surveyed by The Wall Street Journal had expected that quarter-point increase from Bank Negara. The bank had left the rate unchanged since its rate cut in July 2016.
"With the economy firmly on a steady growth path, the MPC (monetary policy committee) decided to normalize the degree of monetary accommodation," Bank Negara Malaysia said. It added that the stance of monetary policy remained accommodative at the current rate.
The increase follows a global move toward tighter policy led by the Federal Reserve. In Asia, the Bank of Korea raised its rates in November for the first time in six years, while China has nudged up its short-term market rates.
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The decision signals the Malaysian central bank's confidence that the economy is strong enough for firms and households to withstand higher borrowing costs and a stronger currency.
"Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy," Bank Negara Malaysia said. It added that domestic demand will also remain the key driver of growth.
Malaysia's economy expanded at a faster-than-expected pace in the first three quarters of last year. Strong trade and firmer oil prices are expected to continue driving growth in 2018, helped by government spending ahead of general elections due later in the year.
A softer dollar, expectations of a rate increase as well as higher oil prices--Malaysia is a net oil exports--have lifted the ringgit, which has been the best performing currency in Asia so far this year.
It appreciated 8% against the U.S. dollar since the bank's hawkish policy statement in November, and economists see scope for further gains.
"I think they are quite comfortable on the prevailing [overnight policy rate] level as inflation rate is expected to moderate in 2018 from 3.7% in 2017 as a stronger ringgit would also mitigate the inflationary pressures," said Dr. Mohd Afzanizam Abdul Rashid, Kuala Lumpur-based Bank Islam Malaysia's chief economist, after the announcement.
He added that they expect the rate to be maintained throughout 2018.
KUALA LUMPUR, Malaysia -- Malaysia's central bank raised interest rates for the first time in three-and-a-half years Thursday, easing its support for the economy just months before an election that is likely to focus on the ruling party's success in generating economic growth and improving living standards.
With the widely expected move, Bank Negara Malaysia joins some of the most powerful central banks in the world, including the Federal Reserve, the European Central Bank and the Bank of England, in judging their economies strong enough to withstand tighter monetary conditions.
While the rate increase may be viewed as a sign of success for Prime Minister Najib Razak's administration in managing the economy, higher rates could prove unpopular among voters if they add to the weight of household debt in Malaysia, already among the highest in Asia. Costlier debt would come on top of subsidies cut in 2015 and a broad-based consumption tax that have squeezed household finances.
The bank raised its main policy rate by a quarter percentage point to 3.25% in a move largely telegraphed by the central bank at its last meeting in November, when it said that improving economic conditions warranted a review of its policy.
In Asia, the move follows the Bank of Korea's decision to raise rates in November for the first time in six years, and China's nudging up of short-term market rates.
Malaysia's economy expanded at a faster-than-expected pace in the first three quarters of 2017. Strong trade and firmer oil prices are expected to continue driving growth in 2018, helped by government spending ahead of the general election.
A softer dollar, expectations of a rate increase as well as higher oil prices--Malaysia is a net oil exporter--have lifted the ringgit, which has been the best performing currency in Asia so far this year. It appreciated 8% against the U.S. dollar since the bank's hawkish policy statement in November, and economists see scope for further gains.
But as in other Southeast Asia economies, stronger headline growth for the economy and the export sector will take time to filter through to the wider populace.
"We are a bit surprised by the move since the election is just around the corner with household debt close to 90%," opposition parliamentarian Wong Chen said. He said further gains in the local currency that could follow the rate increase might be touted by the government as more proof that the economy is recovering.
The prime minister's office did not respond to a request for comment. Mr. Najib is expected to call parliamentary elections in the first half of the year, where he would lead the ruling government against an opposition that includes a coalition led by Mahathir Mohamad, the country's longest-serving prime minister and Mr. Najib's former mentor.
Mr. Mahathir helped transform Malaysia from a commodity dependent backwater into one of Southeast Asia's most prosperous economies during his rule from 1981 to 2003. He is a harsh critic of Mr. Najib. Both men have accused the other of corruption and abuse of power -- accusations they deny.
The prime minister made an indirect dig at Mr. Mahathir's economic stewardship earlier this week, when he said he would never peg Malaysia's ringgit to the U.S. dollar, a comment that pushed the local currency up to a 20-month high. The level of the ringgit should reflect the strengths of the Malaysian economy in the longer term, he added.
Mr. Mahathir pegged the ringgit against the dollar after the outbreak of the Asian financial crisis in 1997-1998 to stabilize the currency.
Write to Yantoultra Ngui at firstname.lastname@example.org
(END) Dow Jones Newswires
January 25, 2018 09:17 ET (14:17 GMT)