Key interest rate up by 25bps to 3.25%

KUALA LUMPUR: Bank Negara Malaysia has raised the key interest rate by 25 basis points during its Monetary Policy Committee (MPC) on Thursday which was in line with expectations.

This will raise the overnight policy rate (OPR) to 3.25% – the first increase since July 2014.

The move sent the ringgit up to 3.8890 to the US dollar just after the announcement at 3pm.

At 3.15pm, the ringgit was up 0.39% to the US dollar at 3.8962.

The OPR is the benchmark for the commercial lending and deposit rates. The move will also see banks raise the lending and savings rates subsequently.

In a statement issued on Thursday, Bank Negara said: “The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3% and 3.50% respectively.”

BNM said the latest indicators reaffirm the strength in exports and domestic activity. 

“Looking ahead, the strong growth momentum is expected 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 favourable income and labour market conditions,” it said. 

Commenting on the outlook for investment activity, Bank Negara said it was also positive, underpinned by new and on-going infrastructure projects and capital spending by both export- and domestic-oriented firms. 

“The external sector will provide additional impetus to the economy. Overall, growth is expected to remain strong in 2018,” it said. 

Bank Negara said with the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation. 

At the same time, the MPC recognises 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. 

“At the current level 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,” it said.

MIDF Research said the decision is expected as industrial and trade activities across major as well as emerging economies remain on upward trajectory. 

“We forecast Malaysia’s economy to grow by 5.5% in 2018, slower than previous year’s forecasted growth of 5.9%. Among others, external trade and industrial activities are expected to remain on upbeat momentum underpinned by sanguine business environment and gradual rise in commodity prices.

“OPR to remain at 3.25% in 2018. Our baseline view is for one rate in 2018. Even though economic indicators are moving into positive direction, we concur the timing of the hike could not be better. 

“The hike is seen as a step to normalise the degree of monetary accommodation rather than the beginning of tightening cycle,” said MIDF Research.