The Malaysian central bank has raised its benchmark rate from an all-time low to combat inflation

[ASEAN NOW Content Team]

 

On Wednesday, Malaysia's central bank unexpectedly lifted its benchmark interest rate from an all-time low to calm inflationary pressures as the Southeast Asian country recovers from the COVID-19 outbreak.

The Bank Negara Malaysia (BNM) raised its overnight policy rate to 2% from 1.75 percent, the lowest level since July 2020.

According to a Reuters survey of 18 analysts, rates will mostly remain steady, with the central bank likely to begin tightening next quarter to combat rising inflationary pressures. Only four economists predicted a rate increase.

 

The central bank stated that the most recent statistics showed that economic development was on a more solid foundation, and that the extraordinary conditions that prompted rate reductions during the pandemic had passed.

"Global commodity price movements, deriving primarily from the ongoing military situation in Ukraine and prolonged supply-related disruptions, as well as domestic policy actions on administered prices, continue to influence the inflation outlook," the central bank said.

 

However, existing government pricing restrictions and economic spare capacity will help to limit price increases, according to the report.

This year's headline inflation is expected to be between 2.2 and 3.2 percent, unchanged from the previous forecast.

BNM's rate move, albeit earlier than expected, should not be interpreted as a sign of aggressive tightening, according to Capital Economics' Asia economist Alex Holmes.

 

"While the economy should continue to rebound in the next quarters," he wrote in a note, "there is still a long way to go."

Holmes anticipates two additional 25-basis-point rate hikes over the rest of the year, with a third at the start of 2023.

BNM's next hike is expected in September, giving the central bank "space to judge whether upside risk to inflation or downside risk to growth will be the greater foe, before choosing whether to hike further from there," according to OCBC Bank analyst Wellian Wiranto.

 

Following the rate hike, the ringgit gained 0.1 percent, while the Malaysian stock index gained 0.3 percent.