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.
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