Bank Negara rate hike is timely move

IT had been so well flagged at its last monetary meeting that it didn't surprise anyone when Bank Negara Malaysia finally raised interest rates last week. The overnight policy rate was raised 25 basis points to 3.25 per cent, the first hike in three years. The central bank described the move as "normalisation" of monetary policy, presumably a reference to the eventual rate hikes expected in the US post-taper. It's about time.

There were various reasons for a hike before this. The weak ringgit, for one; negative real interest rates, for another. Given current inflation rates, savings deposit rates are now at minus 0.8 per cent. That's not only depressing but it penalises savers and probably accounts for the drop-off in term, or fixed, deposits that had become apparent since the last quarter of 2013.

In its policy statement explaining the rate hike, the central bank said that with growth remaining firm but "with inflation remaining above its long-term average", it had decided to adjust the degree of monetary accommodation. That's central bankspeak for "tighten" and it's easy to see why. Economic growth so far has been robust at 6.2 per cent in the first quarter and all the signs - strong export growth amid resilient domestic demand - point to Q2 growth at around 6 per cent. But inflation was 3.3 per cent in June and is expected to clock in at an average of around 3.6 per cent for the whole of 2014.