Malaysia: Central Bank raises rates in July
July 10, 2014
At its 10 July monetary policy meeting, the Central Bank decided to increase the Overnight Policy Rate (OPR) from 3.00% to 3.25%. The move was consistent with market expectations. The Bank had kept its policy rate unchanged since May 2011, but signaled at it its previous meeting in May that an adjustment was on the horizon given strong growth prospects, inflation running above average and the risk of a build-up in economic and financial imbalances.
Bank Negara Malaysia stated that global economic growth has resumed its path of gradual recovery after a weak first quarter. Growth in Asia is being driven by improvements in the external sector as well as strengthening domestic demand. The Bank also emphasized the stability of international financial markets. Domestically, recent data reflect, “continued strength in exports and private sector activity.” Exports will continue to grow on the back of recovering major economies and strong regional demand. Private consumption is being supported by, “stable income growth and favorable labor market conditions.” Moreover, the Bank expects the positive momentum to be sustained and explained that it expects the, “economy to remain on a steady growth path.”
Regarding price developments, the Central Bank recognized that inflation has stabilized as the impact of the fuel price adjustments associated with fiscal reordering moderate. In fact, inflation fell from 3.4% in April to 3.2% in May. However, the Bank added that, going forward, inflation will, “remain above its long-run average due to the higher domestic cost factors.”
With strong growth prospects and inflation running above its long-term average, the Bank decided to, “adjust the degree of monetary accommodation.” The higher OPR will continue to support the economy, but is aimed at mitigating the risk of economic and financial imbalances that could threaten growth prospects.
Author: Carl Kelly, Economist