HONG KONG - The Malaysian swaps curve flattened on Friday amid investor expectations of more rate increases, a day after the central bank began a campaign to 'normalise' interest rates.

On Thursday, after markets shut, Bank Negara Malaysia raised interest rates by a quarter of a point to 2.25 percent, making it the first central bank in Asia outside Australia to hike as part of efforts to unwind crisis policies.

Swap rates for shorter tenors rose and at the longer end rates fell signifying market expectations of a measured pace of increases rather than a drastic campaign.

One year interest rate swaps rose by nearly 5 basis points to 2.68 percent, while two year swaps also rose marginally.

However, the swaps for longer tenors fell by 3 to 10 bps.

As a result the gap between the five year and two year swaps fell 3 bps to 73 bps. It has fallen almost 35 bps since the start of the year.

ING Bank expects the gap to narrow further to 50 bps.

'We forecast the 25 bp hikes at the next two policy meetings in May and July. We expect half of the forecast 75bp of cumulative OPR hikes to be transmitted to the 5-year MGS yield,' it said in a note.

Standard Chartered Bank expects the central bank to hike rates by another 50 basis points this year.

HSBC expects a more aggressive rate hiking campaign.

It sees Thursday's move as the first in a series of hikes this year which could see an aggregate rise of 100 basis points in the policy rate as a strong economic recovery meant price pressures were rising quickly.

In South Korea, where financial markets are increasingly expecting less aggressive monetary policy moves after data showed Asia's fourth-largest economy is losing steam, swaps continued to fall, particularly at the short end of the curve.

One year swap rates fell 2 bps to 3.27 percent. Bond futures initially rose but ended lower.

The March contract on 3-year treasury bond futures jumped as much as 10 ticks to 110.90 before closing at 110.74.

The certificate of deposit rate fell 2 basis points to end at 2.86 percent, the first time it has declined since October 2009.

'It's a significant move which has been anticipated by the market. We expect more paid positions to be unfound and the curve will continue to bull-flatten,' said Royal Bank of Scotland in a research note.