Malaysia unexpectedly raised its benchmark interest rate by a quarter point on Wednesday, as it seeks to preemptively ward off inflationary pressures amid strong domestic demand and looming subsidy cuts.
(Bloomberg) — Malaysia unexpectedly raised its benchmark interest rate by a quarter point on Wednesday, as it seeks to preemptively ward off inflationary pressures amid strong domestic demand and looming subsidy cuts.
Bank Negara Malaysia hiked the overnight policy rate to 3%, a move predicted by just three out of 19 economists in a Bloomberg survey. The rest had expected the central bank to stay pat for a third straight meeting.
“The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy including on subsidies and price controls, financial market developments, as well as global commodity prices,” the central bank said in a statement.
Wednesday’s move marks the return of borrowing costs to pre-pandemic levels by BNM after a brief pause in adjustments earlier this year. The decision comes ahead of the government’s plans to cut diesel and gasoline subsidies, which could potentially add to price pressures, and precedes the Federal Reserve’s meeting where US central bankers are expected to move by a quarter-point before standing pat for a while.
“Headline inflation trended lower in recent months on account of moderating cost factors,” the central bank said. “However, core inflation will remain at elevated levels amid firm demand conditions.”
While Malaysia’s March’s core inflation — which strips out volatile food and energy prices — remained sticky, surpassing headline inflation for a sixth straight month, current economic conditions suggest BNM may have reached the end of its tightening cycle for 2023.
Malaysia is showing signs of wear from the weakened global demand, with outbound shipments in March contracting for the first time in nearly three years.
“BNM will leave the OPR unchanged for the rest of the year, in cognizant of a softer inflation outlook globally in 2H23, an expected end to global rate hike cycle by mid-2023, and rising recession risks in advanced economies,” said Julia Goh and Loke Siew Ting of United Overseas Bank ahead of the decision. The duo had correctly predicted Wednesday’s rate hike.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.