TIMELY MOVE

BANK Negara Malaysia’s decision to tighten the monetary policy yesterday will help reduce the risk of financial imbalances and result in sustainable economic growth, say economists.

BANK Negara Malaysia raised the key Overnight Policy Rate (OPR) by 25 basis points (bps) to 3.25 per cent yesterday — the first interest rate hike in 3½ years — as the economy remains firmly on solid growth.

Economists backed the central bank’s move to tighten the monetary policy, saying it was timely as it would reduce the risks of financial imbalances and result in a more sustainable economic growth.

Bank Negara said the Monetary Policy Committee (MPC) decided on the rate hike to normalise the monetary policy.

“At the same time, the MPC recognises the need to preemptively ensure that the stance of the monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time,” it said in a statement yesterday.

The floor and ceiling rates for the OPR are correspondingly raised to 3.0 and 3.50 per cent, respectively.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes that Bank Negara will be comfortable with the new OPR level as inflation is expected to moderate this year.

“The move should be lauded as it will reduce the risks of financial imbalances and allow for more sustainable economic growth,” he told NST Business.

“It was our call that OPR would be hiked by 25 basis points this year.

“Therefore, we are of the view that the OPR would be maintained throughout this year,” Afzanizam added.

MIDF Research said the hike was seen as a step to normalise the degree of monetary accommodation rather than the beginning of a tightening cycle.

It also expects the OPR to remain at 3.25 per cent this year.

“Our baseline view is for one rate hike this year. Even though economic indicators are moving into positive direction, we concur that the timing of the hike could not be better.”

Bloomberg Economics economist Tamara Mast Henderson said Malaysia’s outlook this year remained relatively robust.

Household spending will be supported by new government measures to boost earnings.

“For this oil-exporting country, the sharp increase in oil prices should support export growth through at least the first half, if not longer. It also spells higher demand-pull, in addition to costpush, price pressures.”

CIMB Group Holdings Bhd group chief executive officer Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the hike was supportive of Malaysia’s strong growth trajectory.

“The modest 25 bps hike is something that we feel the market is able to absorb, particularly with the stronger ringgit and with the government having a firm grip on inflation,” he said, adding that it did not expect any further hikes in the near term.

Bank Negara said at the current OPR level, the stance of monetary policy remained accommodative.

It expects Malaysia’s strong growth momentum to continue this year, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy.

“Domestic demand will remain the key driver of growth, underpinned by favourable income and labour market conditions,” said Bank Negara.

The outlook for investment activity was also positive, driven by new and ongoing infrastructure projects and capital spending by export- and domestic-oriented firms, it added.

Bank Negara said inflation was expected to average lower this year, on expectations of a smaller effect from global cost factors.

Headline inflation averaged at 3.7 per cent last year.

“A stronger ringgit exchange rate this year compared with last year will mitigate import costs. Global energy and commodity prices are expected to trend higher this year.

“However, the trajectory of headline inflation will be dependent on future global oil prices, which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate,” it added.

For this oilexporting country, the sharp increase in oil prices should support export growth through at least the first half, if not longer.

TAMARA MAST HENDERSON

Bloomberg Economics economist