beyondbrics

India has raised official interest rates nine times in a year, and China four times in six months, but little Malaysia’s 25 basis point rise may be a better guide to how serious Asia’s inflation problem really is.

Zeti Akhtar Aziz, the long-serving governor of Bank Negara, celebrated her reappointment for a further five years by announcing on Thursday that interest rates would go up to 3 per cent, backed up by an increase in the reserve requirement for commercial from 2 per cent to 3 per cent.

The governor, who has been in office since May 2000, surprised global markets by hiking interest rates in March 2010 ahead of other Asian central banks, effectively firing the starting gun for the tightening cycle that has dominated regional monetary policy ever since.

Bank Negara raised twice more between March and July last year, but then put monetary policy on hold, confident that the inflation monster was under control in Malaysia, while slower moving central banks struggled to catch up.

Getting ahead of the curve has not protected Malaysia completely, though, and with inflation now running at a 23 month high of 3 per cent the bank has decided it is time to resume tough action, in spite of worries about economic growth, currently forecast to fall to between 5 and 6 per cent from 7.2 per cent last year.

Malaysia has been helped by the strength of its currency, which has risen by nearly 8 per cent over the past year, moving beyond M$3 to the US dollar for the time in 13 years in April.

However, the bank said it was worried about global commodity and energy prices, together with the danger that rising inflation in its major Asian trading partners could spill over into the domestic economy in the second half of the year.

Bank Negara’s action followed a second rate rise this year by the Philippine central bank, which raised its benchmark rate to 4.5 per cent from 4.25 per cent, and a surprise 50 basis point increase announced by the reserve bank of India on Tuesday.

Official concerns that inflation could force a slowdown in developing Asia’s high rates of growth emerged clearly yesterday in Hanoi, where Haruhiko Kuroda, president of the Asian Development Bank, warned that some countries in the region were showing signs of overheating.

Kuroda, who called for precautionary measures to contain inflation, did not specify which countries he meant. But it is a fair bet that he had India and China, the region’s two giant economies, at the forefront of his mind, rather than hawkish Malaysia.

Related reading:
Global economy: An inflated outlook, FT
Asian currencies expose cracks in dollar peg, FT
Malaysia file, beyondbrics