After more than three years, Malaysia has finally raised its key interest rate. This happened after the central bank looked for ways to avoid financial imbalance risk and, concurrently, after the Malaysian economic growth quickened within the first six months of 2014. Meanwhile, Bank Negara Malaysia raised its overnight policy rate by 25 basis points to 3.25 percent. According to Bloomberg News, this shouldn't be considered a surprise at all, since 15 out of the 21 surveyed economists predicted this decision while 6 forecasted no change at all. Future decisions by Malaysian banks will depend on the risks for inflation and growth.
The First Southeast Asian Country to Raise Its Benchmark Rate
This year, Malaysia ended up the first country in Southeast Asia to raise its benchmark rate this year, which means that in the first quarter, it's arguably this nation that led the economic race in 2014. This underscored the confidence of policy makers in Malaysia's economic surge. Unlike other countries, both of Malaysia's domestic and foreign demands are on the rise, leading to a road of recovery and realized economic potential. According to the Malaysian central bank, dangers lurk in every corner. Specifically, the prolonged period of accommodation might encourage some gung-ho, overenthusiastic investors to misallocate resources and misprice risk.
Malaysia is ready for such threats. The bank signaled that it's ready to raise borrowing costs in order to minimize the above mentioned risk for calamity. While some might be wary about the central bank's decision to tighten monetary policy, thus discouraging investors and curbing domestic demand, analysts like Krystal Tan, a Capital Economics Ltd. analyst from Singapore, reassures that Malaysia is healthy and prepared enough to withstand such measures. Recent economic data regarding Malaysia's first quarter performance in 2014 remains strong, thus necessitating this security measure without any significant financial backlash. What's more, it could lead to similar increased in the second, third, and fourth quarters of 2014.
Other Things of Note about Malaysia's Successful First Quarter
However, not everything is on the rise in Malaysia. There was a 0.3 percent drop of the Ringgit recently as of this writing, and it's the biggest decline according to compiled Bloomberg data. This fortunately came about after a 0.8 percent rise in July, the best performance among Bloomberg-tracked currencies from emerging markets, so at least Malaysia is still on the lead and there's less amount of recovery to deal with. The only other currencies doing better in the same category are the Colombian peso and the Indonesian rupiah. The bottom line here is that Malaysia's accommodation of foreign investors has paid dividends by leaps and bounds.
Therefore, the central bank feels that it's about time it dialed back on all this accommodation, since the economy is doing fine and has gotten the improvements that it's been searching for. This is according to ING Groep NV's head of Asian research, Tim Condon. He feels like Malaysia is declaring victory, but he also warns that there's no need to tighten policies too much to the point of it backfiring and having foreign investors pull out altogether. Of course, the Malaysian financial sector is sending the message that they won't overdo their tightening of purse strings and dialing back of accommodations to the foreign markets at large.
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