Bank Negara Malaysia unexpectedly cuts interest rate by 25 bps

Malaysian central bank, Bank Negara Malaysia, unexpectedly lowered its Overnight Policy Rate by 25 basis points to 2.7 percent. The consensus expectation was to keep the interest rate on hold at 3 percent. This is the lowest level of the OPR since 2011. The central bank’s latest statement reads as being more positive on global growth, “latest indicators and the dissipation of trade tensions point to improving global trade activity”. The view on downside risks continues to be largely the same.

BNM, on the domestic front, said that the latest economic indicators and supply disruptions in commodity-related sectors “point to moderate economic activity in Q4”. The BNM forecasts growth to rebound gradually this year, with continued support from household spending, better export performance and a modest rebound in investment activity. Domestic risks continue to be on the downside and include commodity sector softness and delays in the implementation of projects.

In spite of the positive tone on both domestic and global growth, the Malaysian central bank opted to lower its interest rate as a “pre-emptive measure to secure the improving growth trajectory”.

“In our view, the rate cut, together with the tax incentives announced in Budget 2020, could help support a recovery in investment. Furthermore, the delay in implementation of floating RON95 grade fuel prices will continue to aid households’ wallets, thus aiding private consumption. We also expect the nascent upturn in the tech cycle and the stabilization in US-China tensions to aid Malaysia’s exports”, said ANZ in a research report.

The BNM anticipates inflation to accelerate but stay modest in 2020, with the trajectory dependent on the timing of the shift to floating RON95 petrol prices. The likelihood of a less-than-expected rise in inflation because of the delay in shift to floating petrol prices possibly provided a bit more room to lower the policy rate.

“We also note that, after bottoming out in August, the real policy rate had moved higher in recent months. This likely also played a role in the BNM’s decision to cut the policy rate. After the front-loaded rate cut today, the OPR is now at its lowest level since early 2011. With growth prospects improving, we expect the BNM to remain on the sidelines through the rest of the year”, added ANZ.