KUALA LUMPUR, Jan. 25 (Xinhua) -- The Malaysian Central Bank raised its Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent on Thursday, the first time in three years, joining more central banks in tightening the monetary policy.
The floor and ceiling rates of the corridor for the OPR were correspondingly raised to 3.00 percent and 3.50 percent respectively, Bank Negara Malaysia said in a statement.
"With the economy firmly on a steady growth path, the Monetary Policy Committee (MPC) decided to normalize the degree of monetary accommodation."
"At the same time, the MPC recognizes the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time," it said.
The central bank raised the OPR by 25 basis points to 3.25 percent in July 2014, but cut its OPR to 3 percent in July 2016.
"At the current level (3.25 percent) of the OPR, the stance of monetary policy remains accommodative. The MPC will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation," said the bank.
The bank also expects Malaysia's headline inflation to be averagely lower this year after it averaged at 3.7 percent in 2017, due to a smaller effect from global cost factors.
It also expects a stronger ringgit exchange rate compared to 2017 will mitigate import costs.
Although the global energy and commodity prices are expected to trend higher this year, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain.
Thus, the banks believed the underlying inflation, as measured by core inflation, remains moderate.
The central bank also expects Malaysia's strong growth momentum to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy.
Domestic demand will remain the key driver of growth, underpinned by favorable income and labor market conditions, it said.
The outlook for investment activity is also positive, driven by new and on-going infrastructure projects and capital spending by both export- and domestic-oriented firms, it said, adding the external sector will provide additional impetus to the economy.
"Overall, growth is expected to remain strong in 2018," it emphasized, adding that the latest indicators reaffirmed the strength in exports and domestic activity.
The rate hike was generally in line with economists' expectations, and most economists expect the bank to keep the rate for the rest of the year.
"The timing for the rate hike is right judging from the country's economy outlook. Based on the central bank tone, I think the bank is optimistic on Malaysia's economy outlook," UOB Global Economics and Markets Research senior economist Julia Goh said.
She, however, did not think the tone signaled another rate hike this year, unless Malaysia's economic growth continues to beat the central bank's forecast.
The Malaysian economy grew 6.2 percent year-on-year in the third quarter, the strongest growth since the second quarter of 2014. The official projected growth rate for 2017 was 5 percent to 5.5 percent.
Concurred with Goh, Standard Chartered Bank's ASEAN and South Asia's chief economist Edward Lee also believed the central bank will shift to neutral stance following the rate hike.
"We do not think this is the start of a hiking cycle ... A single rate hike will be aimed at mitigating negative interest rates and reversing the 25 basis point rate cut in July 2016," he told a briefing Thursday.
To him, the interest cut in 2016 may had been a pre-emptive decision to counter negative repercussions for Malaysian economy from the Brexit decision.
ANZ Research, however, continues to expect another rate hike of 25 basis points in September.
"Based on the views expressed in the policy statement, we acknowledge that further tightening is uncertain. The ringgit strength also appears to become a part of the central bank's reaction function," it said.
