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Malaysian central bank hikes interest rate by 25 bps, likely to hike again in September

Malaysian central bank, Bank Negara Malaysia, hiked its overnight policy rate today as expected. The BNM rose the rates by 25 basis points to 3.25 percent, reiterating its projection that the currently strong and widespread growth momentum would carry on. Also, the growth momentum is expected to be underpinned by strong labor market and a strong pipeline of public and private investment projects.

The headline inflation for this year is expected to be below the 3.7 percent averaged in 2017, noted ANZ in a research report. Contributing to the lower inflation would be lower import prices arising from a stronger MYR. However, the central bank did acknowledge that global oil prices to lend uncertainty to the trajectory of headline inflation, stated ANZ.

BNM also highlighted that the decision to raise the OPR was partially due to the need to avert a build-up of risks in the financial system. The overall policy stance is still characterized as accommodative. Given these views, additional tightening is uncertain. The strength of Malaysian ringgit also seems to becoming a part of the central bank’s reaction function.

“We however continue to expect another rate hike of 25bps in September. Although tradables inflation will undoubtedly be influenced by MYR strength, firm domestic demand implies that core inflation is likely to move higher”, added ANZ.

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