Bank Negara seen hiking key rate well before vote, while growth strong

Bank Negara Malaysia (BNM) is expected to raise its benchmark rate for the first time in 18 months on Thursday, a Reuters poll showed, at a time that growth momentum has picked up yet not too close to national elections that must be held by August.

A slim majority of economists polled - six out of 10 - predicted BNM will raise its overnight policy rate by 25 basis points to 3.25 percent.

Such a move would take the rate back to where it was between July 2014 and July 2016, when BNM reduced it to 3.00 percent on concerns about slow growth and possible risks from Britain's Brexit vote.

The economists who expect a hike on Thursday think this is the best window for BNM to "normalise" its key rate, as growth and private consumption remain buoyant. And the election, expected to be a bitter fight between Prime Minister Najib Razak and one-time mentor Mahathir Mohamad, could be less than six months away.

"We're going to have elections and after that, in the second half we expect quite a bit of fiscal tightening based on the pattern over the past few years," said Brian Tan, a Singapore-based economist for Nomura.

"It's now or never" for raising the key rate, he said.

At its last policy meeting on Nov 9, the central bank raised the possibility it may review policy to adapt to improving economic conditions in Malaysia and globally.

BNM struck a more bullish note on the domestic economy than before, saying Malaysia's economic growth "has become more entrenched".

For the third quarter, Malaysia reported annual growth of 6.2 percent.

Even if there's a hike on Thursday, the overall monetary policy will remain accommodative, though the central bank may need to consider a second hike later if growth and higher oil prices put sustained upward pressure on inflation, ANZ said in a note.

Annual headline inflation was 3.4 percent in November, and the December figure will be reported on Wednesday. Inflation hit an eight-year high of 5.1 percent in March.

BNM had said it expects 2017 full-year inflation to be at the higher end of its projected 3-4 percent range.

Kristina Fong, an economist with Malaysian ratings agency RAM Holdings, said it may be too soon to raise the key rate as core inflation has tapered for a few months and growth is likely to moderate this year.

"The main concern is that a premature hike can have the ability to derail economic growth sustainability," Fong said.

- Reuters

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