The central Bank Negara Malaysia lifted its overnight policy rate by 25 basis points to 3.25 per cent, in line with expectations. It last announced an increase in July 2014.
"The global economy has strengthened further," the bank said in a statement, adding that the economy also looked set to continue its recent upward momentum, underpinned by strong domestic demand.
The decision could be a boost for Prime Minister Najib Razak, who must call elections by August. He is battling allegations that billions of dollars were looted from a state investment fund he founded, but denies any wrongdoing.
Malaysia's central bank is the latest to tighten monetary policy in a sign of growing confidence in the global economic recovery.
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South Korea lifted interest rates for the first time in more than six years in November, while the US Federal Reserve hiked rates three times in 2017 and the European Central Bank is preparing to wind in its crisis-era stimulus programme.
Calls are growing in other Southeast Asian countries for rates to be lifted, with some analysts forecasting the Philippine central bank will hike in the first quarter on the back of strong growth.
Capital Economics, a London-headquartered research consultancy, said it did not expect more increases soon as it predicted high household debt would limit consumer spending and growth may slow.
"There is little chance of an aggressive hiking cycle," it said in a note. "We expect that rates will remain unchanged for the rest of this year and next.
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