SINGAPORE (Bloomberg) -- Malaysia moved ahead of Indonesia to become the second Southeast Asian nation to raise interest rates, saying it wants to avoid “financial imbalances” as the economy emerges from last year’s recession.

Bank Negara Malaysia increased its overnight policy rate to 2.25 percent from a record-low 2 percent, and Indonesia’s central bank kept its reference rate at 6.5 percent for a seventh straight month Thursday.
Asia is leading the recovery from the global recession and Australia, China, India and Vietnam have tightened monetary policy to fight inflation and avert asset bubbles. The ringgit rose after the decision on Thursday, overtaking the Indonesian rupiah to become the region’s third-biggest gainer outside Japan this year.
“Although there’s no immediate inflation problem in Malaysia or Asia, central banks should take account of the long lags with which monetary policy works,” said Robert Prior- Wandesforde, an economist at HSBC Holdings Plc in Singapore. “Asian economies can’t continue to grow at anything like current rates without price pressures intensifying.”
Malaysian central bank Governor Zeti Akhtar Aziz may raise borrowing costs gradually, while other central banks will consider their own domestic conditions before making their moves, said Suhaimi Ilias, chief economist at Maybank Investment Bank Bhd. in Kuala Lumpur.
----------Pressure to raise
Asian policy makers risk creating asset bubbles and fueling inflation by keeping interest rates “too low for too long” in their attempt to boost domestic demand, Standard & Poor’s said this week. Australia raised borrowing costs for the fourth time in five meetings, increasing the benchmark rate to 4 percent on March 2.
“Bank Negara’s decision, alongside the Reserve Bank of Australia hike this week, may put pressure on other regional central banks to move earlier,” said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. Policy makers in South Korea, the Philippines and Thailand meet on rates next week.
Indonesia, which has a population nine times the size of Malaysia’s, fared better than its neighbors during the global slump as it relies less on exports. After nine rate cuts from December 2008 to August 2009, its benchmark remained one of the highest in the region.
President Susilo Bambang Yudhoyono, re-elected for a second term in July, has pledged to double spending on roads, seaports and airports to $140 billion over the next five years to help deliver growth of at least 6.6 percent by the end of 2014. The government and central bank are also urging banks to cut lending rates to bolster economic expansion.
----------Bank bailout
Yudhoyono’s focus on growth may be diverted after parliament voted March 3 to request a criminal investigation of Vice President Boediono and Finance Minister Sri Mulyani Indrawati for their roles in a bank bailout, threatening his ability to implement government policies.
“Politics is high profile again and threatens to stall the new reforms Indonesia needs to lift its trend growth rate,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “Nevertheless, we believe that this is just a return to business-as-usual rather than the onset of a big political crisis. We remain bullish on the outlook and expect a first rate hike in May.”
Indonesia’s gross domestic product is forecast to expand 5.2 percent this year after growing 4.5 percent in 2009, central bank Senior Deputy Governor Darmin Nasution said Jan. 22.
----------Exports revive
Malaysia, Southeast Asia’s third-largest economy, emerged from its first recession in a decade last quarter as exports of Sime Darby Bhd. palm oil and Unisem (M) Bhd. semiconductors recovered. Prime Minister Najib Razak has said he expects this year’s expansion to beat the official growth forecast of as much as 3 percent. GDP may expand 6 percent this year, the Sun newspaper cited him as saying this week.
Bank Negara “decided to adjust the overnight policy rate towards normalizing monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process,” it said in a statement on Thursday. “The stance of monetary policy continues to remain accommodative and supportive of economic growth.”
The Malaysian ringgit has appreciated 1.34 percent this year against the dollar, and the Indonesian rupiah gained 1.28 percent. Malaysia’s three-month interbank offered rate rose to a one-year high of 2.42 percent on Friday from 2.3 percent previously, according to the 11 a.m. fixing by the central bank.
-------------Fuel subsidies
Inflation is forecast to be contained in both Malaysia and Indonesia, where the governments subsidize fuel and power costs, according to their central banks. Malaysia’s consumer prices rose for a second month in January, climbing 1.3 percent from a year earlier. Indonesia’s inflation accelerated to a nine-month high of 3.81 percent in February.
Malaysia said on Thursday it would postpone the introduction of a revamped fuel subsidy system. It aims to come up with a new system before October, not May as it said earlier. Indonesia won’t raise electricity and fuel prices in the first half of this year, Finance Minister Sri Mulyani said Feb. 25.
Bank Indonesia’s benchmark rate is at the lowest level since the measure was introduced in July 2005. The current interest rate is conducive to supporting economic recovery and achieving the inflation targets for 2010 and 2011, Bank Indonesia said on Thursday. The central bank doesn’t expect significant inflationary pressures until the end of the second quarter, it said.
Indonesian policy makers next meet to review borrowing costs on April 6, while Malaysia’s rate-setting committee will gather again on May 13.