Jul 11, 2014

Malaysia - Malaysia raises interest rates as inflation causes concern

Follow Me on Pinterest
Malaysia’s central bank has raised key interest rates for the first time in three years amid signs inflation is rising faster than expected and concern over high levels of public debt in southeast Asia’s third-largest economy.

The move makes Malaysia the first Association of Southeast Asian Nations (Asean) country to have raised rates this year. The Asean region is still growing relatively robustly in spite of a recent slowdown in China.

Bank Negara, the central bank, raised its policy rate by 25 basis points to 3.25 per cent. The increase, which had been expected by analysts, is the first since May 2011.

Malaysia on Thursday also reported a surprise jump in industrial production for May of 6 per cent year-on-year, above analysts’ consensus expectations of 4.2 per cent. Strong electronics exports drove the increase.

Bank Negara said “overall growth momentum is expected to be sustained” as exports benefited from a recovery in advanced economies and from regional demand. However, inflation – while contained – was expected to “remain above its long-run average due to the higher domestic cost factors,” it said.
Inflation – currently at 3.4 per cent – has risen in recent months following the withdrawal of some food subsidies and cuts in electricity tariffs as the government of Prime Minister Najib Razak implements structural reforms . A 6 per cent general sales tax, designed to boost state coffers, is due to come into effect in April next year.

Krystal Tan, Asia economist at Capital Economics, said tighter monetary policy was needed “to contain the build-up in financial imbalances”.

The growth in the country’s economy comes amid worries about a build-up of external and household debt. Oxford Economics last month ranked Malaysia as “more risky” than Indonesia, in spite of the smaller country’s recent economic performance, highlighting short-term debt at 15.2 per cent of gross domestic product against less than 5 per cent in Indonesia.

Low interest rates in Malaysia had helped fuel a rapid rise in household debt levels as well as a big increase in house prices, Ms Tan said. Household debt in Malaysia is one of the highest in Asia reaching 86.8 per cent of GDP at the end of 2013.

“A slowdown in credit growth is needed to reduce the danger of a nasty correction further down the road,” Ms Tan added.

ANZ analysts said Bank Negara’s forward guidance appeared “slightly hawkish”, leaving room for another 25 basis point rate rise in September, “especially if risks of destabilising financial imbalances increased”. ANZ said the general sales tax would probably add 1.48 percentage points to inflation next year alone.

Jeremy Grant

Business & Investment Opportunities 

Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. 

No comments:

Post a Comment