Photo taken on Aug. 14, 2020 shows the building of Malaysian central bank, Bank Negara Malaysia, in Kuala Lumpur, Malaysia. (Photo by Chong Voon Chung/Xinhua)

The Malaysian central bank underlines the need to ensure that the stance of monetary policy is appropriate to preventing the risk of future financial imbalances.

The Central Bank of Malaysia on Wednesday decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3 percent.

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.25 percent and 2.75 percent, respectively, Bank Negara Malaysia (BNM) said in a statement.

With the domestic growth prospects remaining resilient, the Monetary Policy Committee (MPC) of the BNM judged that it was time to further normalize the degree of monetary accommodation.

With this decision, the MPC has withdrawn the monetary stimulus intended to address the COVID-19 crisis in promoting economic recovery.

In light of the continued strength of the Malaysian economy, the MPC also recognized the need to ensure that the stance of monetary policy is appropriate to preventing the risk of future financial imbalances.

Cars travel on a street in Kuala Lumpur, Malaysia, May 4, 2020.  (Photo by Chong Voon Chung/Xinhua)

"At the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy," the BNM said.

It also said the MPC will continue to ensure that the monetary policy stance remains consistent with the outlook of domestic inflation and growth.

Meanwhile, the BNM said the global economy continues to be driven by resilient domestic demand supported by strong labor market conditions, and a stronger-than-expected rebound of China's economy.

Nevertheless, it said the global economy continues to be weighed down by elevated cost pressures and higher interest rates.

For most central banks, it said the monetary policy stance is likely to remain tight.

"The growth outlook remains subject to downside risks, mainly from an escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and a sharp tightening in financial market conditions including from further stress in the banking sector," said the BNM.

For the Malaysian economy, the BNM said the latest developments point towards further expansion in economic activity in the first quarter of 2023 after the strong performance in 2022.

While exports are expected to moderate, it said growth in 2023 will be driven by domestic demand.

It also said household spending remains resilient, underpinned by better labor market conditions as unemployment continues to decline to pre-pandemic levels.

The BNM also noted the pickup in tourist arrivals is expected to lift tourism-related activities.

It also said further progress of multi-year infrastructure projects will support investment activity.

People walk past a "final sale" signboard in Kuala Lumpur, Malaysia, Dec. 26, 2022. (Xinhua/Zhu Wei)

Domestic financial conditions also remain conducive to financial intermediation, with no signs of excessive tightening affecting consumption and investment activities, it added.

According to the BNM, risks to the domestic growth outlook are relatively balanced.

It said upside risks mainly emanate from domestic factors such as stronger-than-expected tourism activity and implementation of projects including those from the re-tabled Budget 2023.

Meanwhile, it said downside risks stem from weaker-than-expected global growth and more volatile global financial market conditions.

As expected, the BNM said headline inflation trended lower in recent months on account of moderating cost factors.

It said both headline and core inflation are expected to moderate for 2023, averaging between 2.8 percent to 3.8 percent.

However, it said core inflation will remain at elevated levels amid firm demand conditions.

It also said existing price controls and fuel subsidies will continue to partly contain the extent of upward pressures to inflation.

"The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to the domestic policy including on subsidies and price controls, financial market developments, as well as global commodity prices," it said.