Malaysian central bank likely to cut rate again in September

When the Malaysian central bank, BNM, had surprisingly lowered its interest rate by 25 basis points to 3 percent in July, only one out of 18 economists projected the move. The July cut was the first since 2009. Investors do not seem to expect another move during the central bank’s upcoming meeting on 7 September. However, according to HSBC Global Research, there is a possibility that the BNM might cut the OPR again to make policy accommodation more significant.

Even if the Malaysian economic growth has not collapsed, it is decelerating with the GDP growth easing to 4 percent year-on-year in the second quarter of 2016, as compared with the long-term potential of 4.5 percent to 5 percent. In sequential terms, all expenditure-side components of growth, except for government consumption, were disappointing.

Data that came out since the GDP report do not imply a rebound. The PMI indicated a contraction in manufacturing activity in July and August, and that the employment in the manufacturing sector continued to be pared back, noted HSBC.

Given this backdrop, there is cause for the Malaysian central bank to ease rates further, especially as loan growth has continued to slow sharply, added HSBC. With inflation lower than BNM’s 2 percent to 3 percent comfort range, and expected to remain that way for most of this year, the central bank might cut the interest rate by 25bps one time in 2016, noted HSBC.