Flash Notes-Malaysia: Rate Raised As Expected, Another Looming?

As expected, Bank Negara Malaysia (BNM) raised its benchmark Overnight Policy Rate (OPR) by 25 bps to 3.25%today. This marked the first rate hike since June 2011. The rate decision today is highly anticipated (15 out of 21analysts polled by Bloomberg) after the hawkish rhetoric by BNM at its May monetary policy meeting which pointedto the prospect of the central bank adjusting the degree of monetary accommodation to ensure risks arising fromthe accumulation of broader economic and financial imbalances would not undermine Malaysian’s growth. This wasagain highlighted in the July’s monetary policy statement. The 3-month KLIBOR has moved up to 3.57% ahead ofthe policy decision today from 3.29% at the beginning of the year.

    The rate hike today reflects both elevated inflation and firm growth in the Malaysian economy. Malaysia’s realinterest rate has been negative since December 2013 and although inflation will moderate in the coming months,the higher interest rate will address concern of low real rates. After an exceptionally strong growth of 6.2% y/y in1Q14, we forecast that the economy is on track for full-year expansion of 5.6%. In its monetary policy statementtoday, BNM said it expects the overall growth momentum to be sustained and while demand driven inflationremains contained, CPI is expected to remain above its long-run average due to the higher domestic cost factors. Itexpects the new OPR to remain supportive of the economy.