Thursday, 5 May 2011

Malaysia Raises Key Interest Rate to 3%, Boosts Reserve Ratio on Inflation

Malaysia raised interest rates for the first time this year and asked banks to set aside more cash as reserves for a second time, joining India in stepping up the fight against inflation amid surging oil and food prices.

Bank Negara Malaysia increased its benchmark overnight policy rate to 3 percent from 2.75 percent, it said in a statement in Kuala Lumpur today. The decision was predicted by seven out of 16 economists surveyed by Bloomberg News, with the rest expecting no change. The statutory reserve requirement level will rise to 3 percent from 2 percent effective May 16.

Governor Zeti Akhtar Aziz, the first to raise rates in Asia last year as the region led a recovery from the global recession, is resuming increases after pausing since July as inflation accelerated to a 23-month high. India boosted borrowing costs this week for the ninth time since mid-March of 2010 as rising prices force nations to tighten monetary policy at the risk of slowing growth.

“A 25 basis-point hike is manageable,” Kit Wei Zheng, a Singapore-based economist at Citigroup Inc., said by telephone ahead of today’s rate decision. “What’s the marginal benefit of waiting? If Malaysia was in a recession or could foresee one, you would welcome negative interest rates to stimulate growth. But this isn’t the case here.”

Currencies Gain

Most Asian currencies have climbed over the past year, partly because of foreign capital inflows seeking higher yields. Malaysia’s ringgit has jumped 7.8 percent, advancing beyond 3 per U.S. dollar for the first time in more than 13 years on April 25.

The Southeast Asian nation’s economy may expand 5 percent to 6 percent this year, easing from a decade-high of 7.2 percent in 2010, according to the central bank.

“Global commodity and energy prices are projected to remain elevated during the year, with inflation in major trading partners also expected to rise further,” the central bank said in today’s statement. “There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year.”

Malaysia increased borrowing costs three times last year from a record low. At the last policy decision in March, the central bank ordered lenders to set aside more cash as reserves instead of raising rates. It expects inflation to accelerate to a range of 2.5 percent to 3.5 percent this year from 1.7 percent in 2010.

Destabilization Risk

Today’s decision to further raise the statutory reserve requirement is a “pre-emptive” measure to manage a “significant” build-up of liquidity, the central bank said.

“They can’t afford to let the inflows of money that we’ve seen destabilize the economy,” Manokaran Mottain, an economist at AmResearch Sdn., said in a telephone interview ahead of the announcement. “I expect they will normalize the statutory reserve requirement back towards the 4 percent level.”

Asia faces a “serious setback” from surging oil and food prices that threaten to push millions into extreme poverty, the Asian Development Bank said last week. The region’s growth may be reduced by as much as 1.5 percentage points should the pace of gains in oil and food prices seen so far this year persist for the rest of 2011, it said.

Oil Surges

Crude oil prices have surged more than 16 percent this year as unrest in the Middle East and North Africa threatens supplies. World food prices may rebound after declining in March from a record level, the United Nations said last month.

The annual pace of economic growth in Asian nations including China, South Korea, Singapore,Taiwan and Vietnam slowed in the first quarter compared with the equivalent pace in the three months through December. Growth has still been sufficient to propel the cost of living higher and bolster the case for tighter monetary policy.

The People’s Bank of China, which raised rates for a fourth time in six months in April, said May 3 controlling price increases was its main goal, even after a manufacturing survey indicated that economic expansion may slow. The Philippines increased its benchmark rate for a second time this year today.

“With the economy firmly on a steady growth path, the monetary policy committee decided to adjust the degree of monetary accommodation,” Malaysia’s central bank said today. “The stance of monetary policy remains supportive of growth.”

To contact the reporter on this story: Barry Porter in Kuala Lumpur