Malaysia raises key rate as analysts bet no more this year

Malaysia's central bank raised its benchmark interest rate for the first time since 2014, with economists guessing that it won't need to tighten again this year. Bank Negara Malaysia increased the overnight policy rate to 3.25 percent from 3 percent, it said in a statement in Kuala Lumpur on Thursday, as predicted by 16 of the 20 economists in a Bloomberg survey.

The central bank followed through on its plans after signaling in November that it may adjust its stance given the strength of the economy. The government is forecast- ing growth of as much as 5.5 percent this year, buoyed by a global trade recovery and rising domestic spending. Inflation pressures are also building because of rising fuel and food costs.

"It's a one-and-done rate call," said Michael Wan, an economist at Credit Suisse Group AG in Singapore. "It seems like it's partly just a normalization of a pretty accommodative monetary policy and it doesn't sound like they are in a rush to move further in the next meeting."

The early rate move by the central bank removes some of the uncertainty created by the timing of the general election. Some economists had predicted policy makers would delay any tightening until after the vote, which must be held by August. "With the economy firmly on a steady growth path, the Monetary Policy Committee decided to normalize the degree of monetary accommodation," the central bank said in the statement. The MPC wants to "pre-emptively ensure" that the policy stance is appropriate, to prevent a build-up of risks that could arise from interest rates being too low for too long, it said.

The central bank's statement has a hawkish tilt but it is likely to stay on hold for now, says Mingze Wu, a foreignexchange trader in Singapore at global payments-service provider INTL FCStone Inc. It may be too aggressive to pursue another increase for now with the currency surging, he said. Inflation is expected to average lower in 2018 from 3.7 percent last year, the central bank said, as a stronger ringgit makes imports cheaper. Domestic financial markets have been resilient and the ringgit has strengthened to better reflect the economic fundamentals, it said.

BNM seems to be signaling more tightening may be required with its comment that monetary policy remains accommodative and that it recognizes the need to be pre-emptive to prevent the buildup of risks from interest rates being too low for a long period. That said, I suspect we won't see anymore tightening in the first half of the year (to avoid interference with elec- tions). A hike in the second half may also be avoided. The U.S. is starting to talk down the dollar and is starting to act on its protectionist talk.

Consumer prices rose 3.5 percent in December from a year ago, while the government forecasts inflation will average 2.5 percent to 3.5 percent this year.

The ringgit extended gains after the rate decision, reaching 3.8885 per dollar, the highest since April 2016. The currency has strengthened almost 4 percent this year, the biggest gain in Asia. Government bonds and the benchmark stock index were little changed. Krystal Tan, an economist at Capital Economics in Singapore, isn't expecting any further rate increases this year. Growth will soften, inflation is not going to be a problem, and "further hikes could risk causing the currency to strengthen even more, then there could be some concerns about export competitiveness coming back," she said.

Economists at Australia & New Zealand Banking Group Ltd. said while the central bank didn't explicitly signal further rate hikes, it may raise again in September as core inflation picks up on the back of solid domestic demand. Strong growth elsewhere in Southeast Asia is also fueling calls for tighter monetary policy, with some economists forecasting the Philippine central bank will raise interest rates as early as the first quarter.