It was so blatantly telegraphed after the last MPC meeting, the disappointing thing would be if they didn’t go through with it (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively....
...For Malaysia, latest indicators point to continued strength in exports and private sector activity. Going forward, the overall growth momentum is expected to be sustained....The prospects are therefore for the Malaysian economy to remain firmly on a steady growth path....
...Amid the firm growth prospects and with inflation remaining above its long-run average, the MPC decided to adjust the degree of monetary accommodation. This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy. At the new level of the OPR, the stance of monetary policy remains supportive of the economy.
I’ll be honest, I don’t agree with this move. I can’t find any justification for it. I can find good arguments against any and all the reasons everybody else has been able to come with. Negative interest rates, higher inflation, slow deposit growth, exceptional GDP growth? Financial imbalances? What financial imbalances? These are all grasping at straws.
So it finally occurred to me: this hike in the OPR is not being driven by the incoming data. Nobody can find good reasons, because there really aren’t any.But that I think is precisely the point, and why BNM has made its move now – just as there are no good and cogent reasons for raising the OPR, there are also no good reasons against it.
I think this is the first time in years, where the economy is strong enough and growth is broadly spread enough, that the MPC feels comfortable raising interest rates. This is managing the economy by the seat of the pants and gut instincts, not by rules and slavish adherence to inflation targets.
Fair warning though – if I’m right, the goal will be to reach a particular level for the OPR. There will be no pause to “gauge” the reaction of the economy; it will be instead a gradual and inexorable march towards that goal. The only barrier to stopping it would be a slew of negative data, which I don’t think we’ll see until the beginning of next year, when the 4Q data starts coming in.
The question remains what level of OPR the MPC is aiming at or if they’ll spread it out to lessen the shock (as in 2010-2011) – my bet is between 3.75% and 4.00%, but I’ve no objective basis for that, just a Goldilocks (not too hot, not too cold) feeling.
Whatever the case, look for another 25bps increase at the next meeting (September), or the one following (November), or possibly even both.