Feb. 22 (Bloomberg) -- Malaysia raised its key interest rate a second time in three months to curb inflation, predicting the economy will gain momentum after a fourth-quarter slowdown.
Bank Negara Malaysia raised the overnight policy rate by a quarter-point to 3.25 percent, the highest since the rate was introduced in April 2004, it said in a statement today. An increase was predicted by 14 of the 19 economists in a Bloomberg News survey. The central bank separately said the economy grew 5.2 percent in the fourth quarter, slower than analyst estimates.
Malaysia's inflation rate has more than doubled in the last year and may rise further as the government prepares to increase electricity rates and other controlled prices amid higher oil prices. Central bank Governor Zeti Akhtar Aziz also needs to take into account rising interest rates in the U.S. and Asia after Malaysia removed the ringgit's peg to the dollar in July.
"Inflation risk remains an ongoing concern, with potential increases in administered prices such as power tariffs and petrol," said Lee Heng Guie, an economist at CIMB Securities Sdn. in Kuala Lumpur, who predicted the rate rise. "There is still pressure on the widening yield gap with the U.S."
Malaysia's three-month inter-bank rate of 3.28 percent is 1.5 percentage point lower than the comparable rate in the U.S., according to Bloomberg data. The gap widened from 1.16 point on Sept. 30, spurring capital outflow that contributed to a 12 percent drop in Malaysia's foreign exchange reserves to $70.5 billion in the fourth quarter.
The U.S. Federal Reserve has raised its benchmark interest rate 14 times since June 2004 to control inflation. Until November, Bank Negara's overnight policy rate had been unchanged at 2.7 percent since it was introduced in April 2004 as a benchmark for the country's banks to set lending rates by.
Interest rates in Malaysia are among the lowest in the region. The Bank of Thailand's 14-day bond repurchase rate is 4.25 percent, while Indonesia's benchmark rate has risen to 12.75 percent in six moves between August and December.
Malaysia's ringgit has risen more than 2 percent since a seven-year peg to the U.S. dollar was scrapped on July 21, according to data compiled by Bloomberg. The ringgit fell 0.1 percent to 3.721 ringgit per dollar today.
Bank Negara Malaysia raised borrowing costs for the first time since the 1997-1998 Asian financial crisis in November, when it increased the overnight policy rate to 3 percent.
"Inflationary conditions have remained, mainly on account of higher energy prices and rising costs," the central bank said in today's statement. "While inflationary pressures are not expected to intensify, the rate of inflation is expected to remain in the region of the current levels for some time."
Malaysia's inflation rate was 3.2 percent in January, the Statistics Department said in a separate release today. January's inflation rate was calculated using 2005 as a base year for the first time. The central bank later said December's rate was 3.3 percent using the new method. Consumer prices rose 0.3 percent from December.
The inflation rate more than doubled to 3 percent in 2005, the highest since 1998, from 1.4 percent the previous year, as the government raised retail fuel prices and taxes on tobacco and alcohol to reduce the budget deficit.
The Malaysian economy, Southeast Asia's third largest, expanded 5.3 percent last year, compared with a 7.1 percent increase in 2004, the central bank said today. Growth in the fourth quarter was lower than the 5.3 percent expansion in the previous three months and the 5.7 percent median forecast of 21 economists surveyed by Bloomberg News.
"Malaysia's economic growth strengthened in the second half of 2005 and is expected to gain momentum in 2006, sustained by private sector demand and strong economic growth in the global and regional economies," Bank Negara Malaysia said.
Malaysia's $133 billion economy, a production base for Intel Corp. chips, Dell Inc. notebook computers and Western Digital Corp. disk drives, is benefiting from rising global demand for mobile phones, digital cameras and personal computers.
Malaysia's exports of goods and services, which include semiconductors, hard disks, oil and palm oil, grew 10.4 percent in the fourth quarter, compared with 5.8 percent in the third quarter, the statistics department said today. Manufacturing expanded 7.3 percent in the fourth quarter, up from a revised 3.5 percent in the previous three months.
Economic growth in the fourth quarter was "driven by a pick up in the export-oriented manufacturing sector" which benefited from rising demand "ahead of the U.S. holiday shopping season and the Lunar New Year holidays in Asia," said Suhaimi Ilias, an economist at Affin Securities Sdn. in Kuala Lumpur. Demand was "bolstered further by the recovery in the electronics industry."
That's boosting sales at manufacturers producing in Malaysia, including Western Digital and Top Glove Corp.
U.S. disk-drive maker Western Digital plans to spend as much as $75 million this year to boost capacity and manufacture new products at its Malaysian plant, 50 percent more than it spent in 2005, said Don Blake, Managing Director and Vice President for Asia, on Feb. 16.
Top Glove, the world's largest rubber glove maker, expects sales and profit to surge 40 percent in the next two financial years as orders increase and it boosts market share. Sales will rise to 900 million ringgit and profit will reach 81 million ringgit in the year to August, Chairman Lim Wee Chai said.
Exports amount to more than 120 percent of gross domestic product in Malaysia, while electrical and electronics goods account for about half of exports.
Construction declined 0.6 percent in the fourth quarter, after falling 1.4 percent in the third quarter. That was the seventh quarter of contraction.
The agriculture industry fell 1.1 percent, after gaining 0.9 percent in the three months to September. Mining contracted 2 percent in the fourth quarter, after rising 3.4 percent in the previous quarter.
Services, which account for about half of Malaysia's gross domestic product, expanded 6 percent after growing 7.3 percent in the third quarter.
"The year-end festive season and back-to-school spending and vacation travels by domestic consumers boosted activities in the services sectors like retail, leisure, hotels, restaurants and transportation," said Affin's Suhaimi. "These helped to offset the expected contractions in the agriculture, mining and construction sectors."
Private consumption grew 9 percent in the fourth quarter, after expanding 10.4 percent in the previous three months. Public consumption grew 12.8 percent after gaining 5.9 percent in the third quarter.
"Manufacturing was the main growth driver in the last quarter, and this momentum should spill over into a good part of this year to at least match 2005's performance," said Nor Zahidi Alias, an economist at Alliance Merchant Bank Bhd. in Kuala Lumpur.
Government spending under the Ninth Malaysia Plan, a five- year development plan spanning 2006 to 2010, will help boost growth this year, said economists including Chua Hak Bin of DBS Group Holdings Ltd.
Malaysia's economy may expand 5.5 percent this year, according to the median of 18 economists. That matches the finance ministry forecast made in September. Economic growth in 2006 may exceed last year's targeted 5 percent to 5.5 percent, Reuters reported last month, citing Zeti.