The move by Bank Negara Malaysia to raise the Overnight Policy Rate (OPR) by 25 basis has been expected by economists who are now projecting a further rise in the OPR by year end.

The central bank’s decision to raise the OPR to 2.25 per cent at its Monetary Policy Committee meeting this evening is expected, said Affin Investment Bank economist, Alan Tan. The stronger economic growth for the fourth quarter last year provided the room for Bank Negara to normalise interest rates after cutting it to a historical low last year, he said.

Tan said the process of normalising interest rates amid the backdrop of limited pressure on inflation coincide with the stronger-than-expected 4.5 per cent year-on-year gross domestic product growth in fourth quarter last year. He said with prevailing uncertainty in the global economic recovery, the increase in interest rates should not be seen as tightening of monetary policy but rather the normalising of interest rate which has been at record low, partly to address the issue of financial imbalances. Tan said he also expected a total of 50 basis points hike in OPR this year, which will bring the OPR to 2.5 per cent by end of the year.

Bank Islam Malaysia Bhd’s chief economist Azrul Azwar Ahmad Tajudin said he expected an even bigger increase in the OPR, and was looking at 3.0 per cent as a strong possibility this year. “I expect they (Bank Negara) will increase 25 basis point at each Monetary Policy Meeting until July this year, then it will take a breather until end of the year,” he told Bernama, expecting the move to be gradual. He said the ringgit should gain some grounds following the OPR hike and strengthen further going forward, while the Government’s decision not to make a fuel price adjustment would ease the pressure of inflation this year. “With such a modest inflation outlook, I don’t foresee an aggressive monetary tightening campaign,” he said.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng expected another 75 basis points increase in the OPR this year and expected the rise to be gradual and to the pre-crisis level. He said 3.25-3.5 per cent should be a normal level for the OPR to ensure sustainable growth in the country. Yeah said raising the OPR signalled Bank Negara’s confidence in the economic recovery.

“The confidence is rising. We can see that the GDP projection is achievable,” he told Bernama, adding that many were expecting GDP to grow as much as five per cent this year with the Government looking at 6.0 per cent. He also expected the ringgit to strengthen further this year, in line with other Asian currencies. Yeah also expect the local unit to hit 3.2-3.3 level against the US dollar by end of this year. “The uptrend will continue because of the recent Euro and Pound weaknesses. Asian currencies will appreciate faster than other currencies,” he added.

Malaysian Investors Association president Datuk Dr P.H.S. Lim attributed the hike in interest rate to the better economic performance in the last quarter of 2009, and the US Federal Reserve move to increase interest rate by 0.25 points to 0.75 points. With a better economic background, interest rate will move up in line with global economic growth and to combat inflation, he added.