• MARCH 4, 2010, 10:35 A.M. ET

Malaysia Raises Rates 

By ALEX FRANGOS

In a sign of the rapidly improving economic fortunes across Asia, Malaysia's central bank raised its benchmark interest rate Thursday and noted the "economic recovery is firmly established."

Malaysia is the first of the medium-sized, export-oriented economies in Asia to raise its target interest rate. Its move will be closely watched in the region, where policymakers have moved gingerly away from the extraordinary policy stimulus put in place during the global financial crisis.

Similar macroeconomic conditions in Taiwan, South Korea, Thailand, Singapore are likely to lead to rate hikes in coming months. All have benefited from their exposure to China and the restocking of inventory in the U.S. and Europe, especially for technology-related goods. Indonesia's central bank kept its interest rate steady on Thursday, saying that inflation remains under control.

"Now that Malaysia has moved, other central banks in the region may feel more comfortable doing so as well," said Matt Hildebrandt, economist with J.P. Morgan in Singapore. He added, though, that tightening would happen only gradually amid concern about the global economic outlook.

Malaysia's rate increase comes after China and India tightened credit through raising bank reserve requirements. Australia, whose economy is heavily reliant on Asian demand, has raised its benchmark rate four times since October, most recently on Tuesday. Vietnam raised rates in December to fight off speculation on its weakening currency.

In recent weeks, Malaysia and other area economies including China, Taiwan and Thailand, announced stronger than expected fourth quarter growth, surprising government economists and hastening the need to return interest rates to more normal levels. Prices have begun to rise across Asia. That combined with the ultra-low interest rates, could spark a dangerous bout of inflation.

"Growth is expected to strengthen further," Bank Negara Malaysia said in its statement accompanying the quarter percentage point hike in the benchmark overnight policy rate, to 2.25%. "Prices will gradually increase during the year," it said, while predicting that "inflation is expected to remain moderate." The bank noted the risks of "rising global commodity and food prices."

Thursday's hike was the first move by Malaysia's central bank since it dropped rates for the final time in February 2009. It was the first rate increase since 2006.

The tightening of monetary policy in the region highlights the gap between recoveries in emerging economies, especially in Asia, and the developed world, where interest rates are expected to remain at rock bottom levels for several more months if not longer. That dichotomy could lead to investors to shift money into the higher interest rates of Asian currencies and away from the U.S. dollar, the euro and the yen.

In the policy statement, the Malaysian central bank cited the "continued improvement" in exports, "particularly from the regional economies," an allusion to the strength of trade within Asia. Traditionally, Asia's export-led economies have relied substantially on demand from the U.S. and Europe. Malaysia's economy grew 4.5% in the last quarter of 2009 compared to the year earlier, helped along by strong consumer spending and trade.
While that relationship between the consumer in the developed world and the producers in the emerging world remains intact, there are signs that growing demand from consumers and businesses within the emerging markets, especially in China, has the potential to fill in for the sluggish buying power among Western consumers.

"A higher proportion of our trade is now with the region," said Malaysia's central bank governor, Zeti Akhtar Aziz, in an interview last week. She said more and more of the products Malaysia ships to China are for Chinese consumers, rather than components that will be assembled into goods for Americans and Europeans. "That's a new development and it has intensified," she said.

Write to Alex Frangos at Alex.Frangos@wsj.com

http://online.wsj.com/article/SB10001424052748704187204575101031978300278.html?mod=googlenews_wsj  

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