Malaysia central bank’s surprise rate hike will dampen market sentiment: economists

MALAYSIA’s central bank made an unexpected move to raise its benchmark interest rate on Wednesday (May 11), which came as a surprise to economists who feel the move could hurt market sentiment and slow down the pace of economic recovery.

At the end of its third monetary policy meeting of the year, Bank Negara Malaysia increased the overnight policy rate (OPR) by 25 basis points to 2 per cent. This was predicted by just 5 out of 19 economists polled by Bloomberg ahead of the announcement.

The OPR has stayed at a record low of 1.75 per cent since July 7, 2020. Over the course of the Covid-19 pandemic, the OPR was reduced by a cumulative 125 basis points as part of efforts to support the economy.

The central bank said the decision to increase was due to inflationary pressure. It added that the sustained reopening of the global economy and an improvement in labour market conditions will continue to support Malaysia’s economic activity, which will cushion the impact of the Russia-Ukraine war and the strict Covid-19 containment measures in China. However, economists raised their concerns that the decision to hike interest rates when the country is in the nascent stage of recovery will dampen market sentiment, thus dragging the heels of economic recovery. Geoffrey Williams, economics professor and dean of the Institute of Postgraduate Studies at the Malaysia University of Science and Technology, said the higher interest rate entails more expensive costs, which is unfavourable for corporate and consumer borrowers and they might hold back their spending or borrowing plans for investment or business expansion. “The only hope is that 25 basis points is too small to have an effect on the real economy but we must wait and see,” he added. He explained that the mandate for the central bank is to maintain price stability, support sustainable economic growth and support the stability of the financial system.  “Price stability is normally taken as 2 per cent to 3 per cent inflation which we currently have. The economy is in the nascent stage of recovery and our financial system remains stable. Thus, there is no real reason within the mandate to raise interest rates at this stage,” said Williams. Wong Chin Yoong, an economics professor at the University Tunku Abdul Rahman Malaysia, said the surprise decision could be driven by the US Federal Reserve’s recent move to raise interest rates to curb soaring inflation.

Although Wong believes Malaysia’s central bank’s decision will hurt market and business sentiment, he says that it could be a sign of a “better than expected” economic performance in the first quarter this year. Malaysia’s economic performance for the first quarter of 2022 is set to be announced on Friday (May 13). “As Bank Negara Malaysia expects this year’s core inflation to fall between 2 per cent and 3 per cent, there are likely to be another 2 rounds of interest rate hike with 25 basis points each in the second half of the year,” he added. Bank Negara projected that headline inflation would average between 2.2 per cent to 3.2 per cent in 2022. Given the improvement in economic activity amid lingering cost pressures, underlying inflation - as measured by core inflation - is expected to trend higher to average between 2 per cent and 3 per cent this year. 

“Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US,” the central bank said in a statement.

The ringgit went up by as much as 0.2 per cent to 4.3760 against the greenback soon after the surprise rate hike. on,The FTSE Bursa Malaysia KLCI, which ended marginally higher at 1,554.58 in the mid-day, continued its uptrend in the hours after the announcement. The benchmark index closed on Wednesday at 1,555.93, up 1.35 points from the previous day.