UPDATE 2-Malaysia c.bank lifts key rate from all-time low on inflation risk

Adds economists’ comment, background

By Liz Lee and Rozanna Latiff

KUALA LUMPUR, May 11 (Reuters) – Malaysia’s central bank unexpectedly raised its benchmark interest rate from an historic low on Wednesday, to cool inflationary pressures as the Southeast Asian country continues to recover from the COVID-19 pandemic.

Bank Negara Malaysia (BNM) raised its overnight policy rate MYINTR=ECI to 2% from a record low of 1.75% where it has been since July 2020.

A Reuters poll of 18 economists had largely expected rates to remain unchanged, with the central bank likely to start tightening next quarter to avert rising inflationary pressures. Only four of the economists had forecast a rate hike. nL3N2WX35K

The central bank said the latest indicators showed that economic growth was on a firmer footing and that the unprecedented conditions during the pandemic that necessitated the easing of rates have since abated.

“The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures on administered prices,” the central bank said.

It added, however, that upward pressure on prices would partly be contained by existing government price controls and spare capacity in the economy.

Headline inflation was projected to average between 2.2% – 3.2% this year, unchanged from its earlier estimate.

Capital Economics’ Asia economist Alex Holmes said BNM’s rate hike, while sooner than expected, should not be taken as a signal of aggressive tightening.

“While the economy should continue to recover in the coming quarters, there is still a long way to go,” he said in a note.

Holmes expects two more rate hikes of 25 basis points each, spaced over the rest of the year, with another at the start of 2023.

OCBC Bank economist Wellian Wiranto expects BNM’s next hike to come in September, allowing the central bank “space to gauge whether upside risk to inflation or downside risk to growth will be the greater foe, before deciding on whether to hike further from there.”

The ringgit MYR= rose 0.1% while Malaysian share index .KLSE rose as much as 0.3% after the rate hike.

Malaysia’s economic growth likely gathered pace in the last quarter, driven by stronger demand following a relaxation of COVID-19 measures, but a prolonged slowdown in China could have significant knock-on effects, according to a Reuters poll published on Wednesday.

Stronger exports, which bodes well for domestic manufacturers, suggests foreign trade remains a growth engine for Malaysia which can also expect rising demand for its palm oil after top producer Indonesia temporarily banned shipments last month to tame soaring domestic cooking oil prices. nL3N2X114Q

Malaysia’s first quarter economic data is due to be released this Friday.

Bank Negara trimmed its 2022 economic growth forecast in March to between 5.3%-6.3%, noting that the country’s recovery will be slightly offset by the expected impact of the Russia-Ukraine war. nL3N2VW20N

Malaysia’s economy returned to growth in the October-December quarter, expanding 3.6% from a year earlier, with the central bank expecting the rebound to continue this year despite risks of further disruptions caused by the coronavirus pandemic. nL1N2UM08D

(Editing by Jacqueline Wong)

((liz.lee@thomsonreuters.com; +603 23338008; Twitter: @livinglizly;))