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Economy

Malaysian central bank raises policy rate to 2.00%

First rate hike since July 2020 surprises markets

Malaysia's central bank raised its benchmark interest rate for the first time in nearly two years on May 11, citing the global economic recovery and improving labor market conditions at home.   © Reuters

KUALA LUMPUR -- Malaysia has raised its benchmark interest rate by 25 basis points, the central bank announced Wednesday, in a surprise move aimed at taming global inflationary pressures.

The overnight policy rate (OPR) was raised to 2.00%, the first increase since the rate reached a record low of 1.75% in July 2020.

The rate hike caught market participants and economists off guard. A poll of 18 economists conducted by Reuters had predicted the central bank would keep the policy rate unchanged at 1.75%.

The central bank, in a statement, explained the increase by referring to the sustained reopening of the global economy and the continuing improvement in labor market conditions, which are supporting a recovery in economic activity.

Over the course of the COVID-19 pandemic of the past two years, the OPR was reduced by a total of 125 basis points to a historic low to provide a cushion for the economy.

"The unprecedented conditions that necessitated such actions have since abated," the central bank said.

"With the domestic growth on a firmer footing, the MPC [Monetary Policy Committee] decided to begin reducing the degree of monetary accommodation," it said. "This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability," the statement read.

The central bank justified the increase, citing a sustained reopening of the global economy and improving labor market conditions, which continue to support the recovery of economic activity.

On the domestic front, the central bank said the latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand and sustained export growth.

"The labor market is further lifted by a lower unemployment rate, higher labor participation and better income prospects," it said, adding, "The transition to endemicity [of COVID-19 phases] on 1 April 2022 would strengthen economic activity, in line with further easing of restrictions and the reopening of international borders."

According to the bank, investment activity and prospects have also improved, underpinned by the realization of multiyear projects and a stronger growth outlook.

Headline inflation is forecast to average between 2.2% and 3.2% in 2022. The central bank said that given the improvement in economic activity amid lingering cost pressures, underlying inflation -- as measured by core inflation -- is expected to trend higher, averaging between 2% and 3% this year.

Since March 2020, Malaysia has experienced four waves of coronavirus variants, forcing the closure of thousands of micro and small businesses as nonessential economic activity was suspended.

As of Tuesday, Malaysia had recorded 4.5 million COVID-19 cases and almost 36,000 deaths. In April, the government relaxed almost all coronavirus-related restrictions, and all economic sectors are operating at full capacity.

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