Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points to 3.25% on Thursday, the first time since May 2011 with economists expecting the rate hike to address the potential rise in financial imbalances.
Alliance Bank Malaysia chief economist, Manokaran Mottain said the hike in the OPR was a "pre-emptive measure to prevent further disproportionate risk taking as well as reducing asset price misalignments".
"While the central bank in previous instances had preferred to make use of macro prudential tools in reducing asset price bubbles risks, the rate hike will likely deliver greater traction in averting any excessive leveraging activities," he said.
BNM said the decision was made at its monetary policy committee (MPC) meeting as the latest economic indicators pointed to continued strength in exports and private sector activity in Malaysia. It also expected Malaysia's overall economic growth momentum to be sustained.
"The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00% and 3.50% respectively," it said. "At the new level of the OPR, the stance of monetary policy remains supportive of the economy."
BNM said going forward, the overall growth momentum was expected to be sustained while inflation has been relatively stable.
"Exports will continue to benefit from the recovery in the advanced economies and from regional demand. Investment activity is projected to remain robust, led by the private sector."
"Private consumption will be supported by stable income growth and favourable labour market conditions. The prospects are therefore for the Malaysian economy to remain firmly on a steady growth path," it said.
BNM said inflation has been relatively stable as the effects of the price adjustments for utilities and energy continue to moderate. Demand driven inflation remains contained, it added.
"Looking ahead, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.
BNM added amid the firm growth prospects and with inflation remaining above its long-run average, the monetary policy committee decided to adjust the degree of monetary accommodation.
This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy, said the central bank.
Alliance Bank's Manokaran said the MPC's decision to raise the OPR by 25bps was within expectation as well as market consensus.
He pointed out that since the previous MPC meeting in May, financial markets had been influenced by this expectation.
The ringgit rallied to RM3.172 against the US dollar on Wednesday, up 2.06% gain. At the close on Thursday, the ringgit was trading at RM3.182.
"In the meantime, the rise in OPR will likely improve Malaysia's attractiveness amongst foreign investors, leading to stronger capital inflows, lower bond yields and an appreciating ringgit.
"Looking ahead, we do not see the recently announced OPR hike to be the start of a monetary tightening process. At the new rate, the OPR remains accommodative of growth. In this regard, we expect the OPR to remain unchanged at 3.25% for the rest of 2014," he said. - By The Star
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