Malaysian central bank cuts key policy rate; lowers inflation outlook for 2016

The Malaysian central bank, Bank Negara Malaysia (BNM), surprisingly lowered its Overnight Policy Rate (OPR) on Wednesday, mainly to offset the anticipated weakness in external demand. The central bank lowered the OPR by 25 basis points to three percent. The central bank stated that the ceiling and floor rates of the corridor for the OPR are correspondingly lowered to 3.25 percent and 2.75 percent respectively.

In its Monetary Policy Statement, BNM said the global economy continues to grow at a more moderate rate throughout major advanced and emerging market economies.

It mentioned that continued weakness in foreign demand has been a drag on Asian economies, even if domestic demand continues to be supportive.

Global economic outlook have also become vulnerable to the heightened downside risks in light of likely consequences from the EU referendum in the UK. BNM stated that international financial markets might also be largely susceptible in the future.

The possible subsequent spillover of Brexit on Malaysia’s real economic activity might be modest. Given that Malaysia ships 10 percent of its exports to the EU, the spillover on private investment and consumption spending from the trade channel would be non-negligible, noted ANZ in a research report. FDI is likely to be impacted, especially by companies directly connected to the EU.

BNM stated that the economic growth continues to be driven by domestic demand. According to the statement, even if investment in oil and gas sector is moderating, the on-going implementation of infrastructure projects and capital spending in manufacturing and services sectors will underpin the overall investment.

The central bank forecasts Malaysian exports to remain subdued after further weakness in demand from the nation’s important trading partners.

The BNM stated that “while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects”. On inflation front, it anticipates inflation to be lower this year at 2 percent to 3 percent, as compared with the earlier forecast of 2.5 percent to 3.5 percent. It expects inflation to remain stable in 2017.

Even if the central bank is likely to keep rates on hold for the remainder of 2016 at 3 percent, the baseline policy call does not diminish from vulnerabilities on two fronts, said ANZ. Given that the BNM remains upbeat about positive demand, the overhang risk of additional rate cut might be set off by a considerable deceleration in domestic demand, especially private consumption, according to ANZ.