Normalisation has started

Malaysia has taken the lead in normalising monetary policy in Southeast Asia as the central bank is optimistic that the current global economic expansion can continue. We expect another rate hike in 3...
Irvin Seah25 Jan 2018
  • Bank Negara has raised its Overnight Policy Rate (OPR) by 25bps to 3.25%
  • A robust economic performance prompted the central bank to normalise its monetary policy
  • We expect another 25bps hike in 3Q18, which will bring the OPR to 3.50%
Photo credit: AFP Photo

Bank Negara (BN) raised its Overnight Policy Rate (OPR) by 25bps to 3.25% at its latest policy meeting. This is the first hike since July 2014. The decision was predicated on the central bank’s bullish assessment that the “risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion”.

Optimism with the domestic economy is also shown with the authorities expecting the current strong growth momentum to continue in 2018, supported by robust domestic demand. Favourable labour market conditions are expected to lift private consumption while investment growth will remain strong, driven by a healthy pipeline of infrastructure projects and increased capital spending.

However, the central bank did acknowledge that inflation will likely ease in the near term. It noted that the strong Malaysian ringgit, which has been the region’s top performer so far this year, will help to mitigate imported inflation.

We had originally expected the rate hike to come after the elections. The decision to move earlier at this meeting is understandable given the favourable global and domestic economic environment. The rate hike essentially reversed its previous rate cut in July 2016. Effectively, Malaysia has taken the lead in normalising monetary policy in Southeast Asia.

Looking ahead, we expect the central bank to hold back its next policy move till after the election. Specifically, we expect BN to raise the OPR by another 25bps to 3.50% in Q3. The risk remains for inflation to move up again in the latter half of the year. By then, it would also be timely to realign rates to higher US and regional rates. In between, the risk of a hike in the Statutory Reserve Requirement ratio should not be discounted as well.

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  Irvin Seah
Economist - Singapore, Malaysia, & Vietnam

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