Economists: Bank Negara to raise benchmark rate well before polls

 |Jan 23, 2018

KUALA LUMPUR: The central bank is expected to raise its benchmark rate for the first time in 18 months on Thursday, a Reuters poll showed, at a time that growth momentum has picked up yet not too close to national elections that must be held by August.

A slim majority of economists polled – six out of 10 – predicted Bank Negara Malaysia (BNM) will raise its overnight policy rate by 25 basis points to 3.25 per cent.

Such a move would take the rate back to where it was between July 2014 and July 2016, when BNM reduced it to 3 per cent on concerns about slow growth and possible risks from Britain’s Brexit vote.

The economists who expect a hike on Thursday think this is the best window for BNM to “normalise” its key rate, as growth and private consumption remain buoyant. And the election, expected to be a bitter fight between Prime Minister Datuk Seri Najib Razak and one-time mentor Tun Dr Mahathir Mohamad, could be less than six months away.

“We’re going to have elections and after that, in the second half we expect quite a bit of fiscal tightening based on the pattern over the past few years,” said Brian Tan, a Singapore-based economist for Nomura.

“It’s now or never” for raising the key rate, he said.

At its last policy meeting on Nov 9, the central bank raised the possibility it may review policy to adapt to improving economic conditions in Malaysia and globally.

BNM struck a more bullish note on the domestic economy than before, saying Malaysia’s economic growth “has become more entrenched”.

For the third quarter, Malaysia reported annual growth of 6.2 per cent.

Even if there’s a hike on Thursday, overall monetary policy will remain accommodative, though the central bank may need to consider a second hike later if growth and higher oil prices put sustained upwards pressure on inflation, ANZ said in a note.

Annual headline inflation was 3.4 per cent in November, and the December figure will be reported on Wednesday. Inflation hit an eight-year high of 5.1 per cent in March.

BNM had said it expects 2017 full-year inflation to be at the higher end of its projected 3 to 4 per cent range.

Kristina Fong, an economist with Malaysian ratings agency RAM Holdings, said it may be too soon to raise the key rate as core inflation has tapered for a few months and growth is likely to moderate this year.

“The main concern is that a premature hike can have the ability to derail economic growth sustainability,” Fong said. – Reuters