Funding conditions in Malaysia’s money market will likely tighten further later this year, with some analysts expecting stronger economic growth to prompt the country’s central bank to raise interest rates.
The three-month Kuala Lumpur Interbank Offered Rate, or Klibor, rose to a one-year high of 3.46% earlier this month. The benchmark measure of borrowing costs is now about 70 basis points above Bank Negara Malaysia’s policy rate, up from around 50 basis points at the start of the year.
While Malaysia hasn’t raised rates in more than three years, bets on a policy tightening move may grow if the Southeast Asian nation’s resilient economy fares even better or unabated Middle Eastern tensions keep energy prices high. Investors will get a fresh opportunity to evaluate the outlook when Malaysia releases the second-quarter gross domestic product growth number on Friday.
"Three-month Klibor can rise further in the second half if GDP growth surprises to the upside and market begins to price in BNM normalization,” said Winson Phoon, head of fixed‑income research at Maybank Securities in Singapore, referring to expectations for a more hawkish central bank policy stance.
Liquidity has tightened since June due to elevated loan levels relative to deposits, Phoon added.
Malaysia’s economy likely grew 5.3% on year between April and June, according to the median forecast among economists surveyed by Bloomberg.
Growth has benefited from both the artificial-intelligence boom and robust spending by households, shielded by state subsidies against the full impact of higher fuel costs. Exports surged 45% on year in May, marking the fastest pace since August 2022.
In late June, JPMorgan Chase & Co. upgraded Malaysia’s growth outlook and expected the central bank to raise interest rates by 25 basis points in the fourth quarter. It previously expected BNM to hold rates this year.
Further tightening of onshore liquidity may weigh on bond demand, after an auction of government debt due in 2035 earlier this month drew the third lowest bid-to-cover ratio this year.
"As short-term money market rates have risen, the carry appeal of 3- and 5-year Malaysia bonds has diminished, which has also reduced the incentive for investors to extend duration further along the curve,” said Lloyd Chan, foreign-exchange strategist at MUFG Bank.
To be sure, some observers have downplayed expectations of any sharp spike in funding costs in the near term, saying that the market appears to have partly priced in a prospective BNM rate hike.
The three-month Klibor is expected to see a mild increase to 3.50% by the year’s end, said Frances Cheung, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp. While OCBC expects a 25-basis-point rate hike by BNM in the first quarter of 2027, the spread between Klibor and the policy rate is already wide, she added.
Still, others point to external factors that could also drive up funding costs, including the fragile US-Iran ceasefire that may intensify inflationary pressures as well as a rebounding dollar.
Interbank rates are expected to face underlying upward pressure "from softer ringgit deposit growth, BNM policy tightening expectations, especially if there are sustained bouts of dollar strength, and banks placing a higher premium on lending out their scarce ringgit liquidity,” said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore. - Bloomberg
