The Central Bank of Malaysia (BNM) raised its key policy rate by 25bp to 3.25% last week, the first hike since July 2014. The decision was based on three reasons. First, external conditions have improved with stronger global demand, broadly stable financial markets and a more balanced economic outlook. Second, economic activity continues to show signs of strength. Exports are expanding at a robust pace; domestic demand is strong, supported by a solid labor market and firm investment growth. Third, average annual inflation of 3.7% in 2017 was close to the upper end of the BNM’s 3%-4% target range. Looking ahead, we expect the tightening cycle to be halted until the end of Q3, because (i) inflationary pressures should stabilize on the back of a strong ringgit, and (ii) uncertainties related to the forthcoming general elections in August call for a gradual approach. Assuming growth remains robust (+4.9% in 2018) and uncertainties fade, the BNM may increase its policy rate by another 25bp in Q4 2018
