Bank Negara, the first Asian central bank to lift borrowing costs in 2010, said its rate hike — its first since last July — will still support economic growth.
The bank, however, said it was concerned about “a significant buildup of liquidity” in the financial system that could result in financial imbalances and “create risks to financial stability.”
The bank raised the Statutory Reserve Requirement (SRR) — the amount of cash reserves banks must keep with the central bank — to 3 percent from 2 percent, effective May 16.
“The SRR is an instrument to manage liquidity and is not a signal on stance of monetary policy,” Bank Negara said in a statement.
Bank Negara, which meets six times a year, said it had raised the floor and ceiling rates of the overnight policy rate, “the sole indicator used to signal the stance of monetary policy” — to 2.75 percent and 3.25 percent, respectively.
“With the economy firmly on a steady growth path, the (monetary policy committee) decided to adjust the degree of monetary accommodation,” Bank Negara said, joining the Philippines, India and Vietnam in raising rates this month.
Joanna Tan, economist at Forecast Pte Ltd., said that while inflation was relatively well contained, Bank Negara, was cognizant of the upside risks.
“And given their tenet to stay ahead of the curve, we suspect another rate hike is in the pipeline. Growth — on the back of global commodities demand — should give Bank Negara the room for further tightening. We’re looking at an overnight policy rate at 3.25 percent by year end,” she said.
Trading in the stock market had ended before the rate decision was announced. The ringgit, which has risen nearly 3 percent this year against the dollar, ended the day at 2.99 ringgit.
Soaring food and energy prices may temper Asia’s economic outlook this year, putting central bankers in a tight spot as they try to cap inflation without choking off growth, Reuters polling data shows.
“There are some signs that domestic demand factors could exert upward pressure on prices in the second half of the year,” Bank Negara said in the statement issued after its regular monetary policy meeting.
“Going forward, the assessment is for the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually during the course of the year,” the central bank said.
Prime Minister Najib Razak, who has announced an investment drive to boost growth, forecasts that the economy will expand by as much as 6 percent this year.
Malaysia, the world’s second largest palm oil producer after Indonesia, is benefiting from rising commodity prices.
