Malaysia Raises Interest Rates for First Time in 3 1/2 Years -- 3rd Update

By FeaturesDow Jones Newswires

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.

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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

(END) Dow Jones Newswires

January 25, 2018 09:17 ET (14:17 GMT)