KUALA LUMPUR: Malaysia unexpectedly raised its benchmark interest rate on Wednesday, as it moved pre-emptively to head off price pressures that risk hurting demand in the economy that is just recovering from the pandemic.
Bank Negara Malaysia (BNM) increased the overnight policy rate by 25 basis points to 2%, a move seen by only five of the 19 economists surveyed by Bloomberg. The rest had predicted no change.
The decision makes Malaysia the latest to join the policy tightening bandwagon, as central banks across the world try to tame inflation stoked in part by supply shocks caused by the war in Ukraine.
With the recovery in the Southeast Asian economy set to strengthen this year thanks to the easing of virus restrictions, BNM was afforded the room to move early to fight price pressures.
While headline inflation at 2.2% has stayed benign and is the lowest rate in Southeast Asia, core inflation, which strips out volatile food and fuel costs, rose 2% in March from a year ago – a level last seen in August 2019. Food inflation jumped 4% year-on-year, the most since December 2017.
The ringgit climbed as much as 0.2% to 4.3760 versus the dollar after the decision, which most economists were expecting only by the second half of the year. The yields on three-year government bonds, which are more sensitive to rate expectations, were broadly steady at 3.78%, erasing a loss of 3 basis points that followed the unexpected move.
The decision came as a surprise to the market given its recent pronouncements about the lack of necessity to react to supply-driven inflation pressure, said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. At the end of the day, it is an acknowledgment of global inflationary pressures, he said.
“Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US,” BNM said in a statement.