Malaysia’s central bank yesterday unexpectedly cut its benchmark interest rate, the latest emerging market to ease monetary policy amid an uncertain global economy.
Bank Negara Malaysia reduced the overnight policy rate to 2.75 percent, a 25 basis-point cut predicted by only two of the 26 economists surveyed by Bloomberg. The rest expected no change.
The move “is a pre-emptive measure to secure the improving growth trajectory amid price stability,” the bank said in an e-mailed statement.
Bank Negara is seeking to bolster Malaysia’s economy after it started showing signs of strain from the global slowdown last year.
Malaysia follows emerging markets like Turkey and South Africa that kicked off the year with rate cuts.
Bank Negra lowered its key rate once last year and reduced the statutory reserve ratio requirement in November as growth in the third quarter slipped to its slowest pace in a year.
The bank cited downside risks to growth, including “uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets and domestic factors.”
“We think the cut is important in January to stimulate the economy,” said MIDF economist Muhammad Zafri Zulkeffeli, one of the two analysts to correctly predict the rate cut. “Because the government forecasts GDP growth to be 4.8 percent this year, while the consensus is lower than that, so you need something to boost the economy this year.”
The economy has shown more recent signs of recovery after a lackluster year confronting external risks. Last month’s manufacturing purchasing mangers’ index signaled an expansion in factory output for the first time in 15 months. Industrial production grew at a five-month high of 2 percent in November last year from a year earlier.
“It looks like [Bank Negara Malaysia] might have taken the window of opportunity of relative global market calm to slot in a preemptive cut, in order to have a shooting chance at reaching what is, to us, a fairly optimistic growth rate this year,” Oversea-Chinese Banking Corp (華僑銀行) economist Wellian Wiranto said.
The ringgit gained 0.2 percent after the rate decision, while the benchmark FTSE Bursa Malaysia KLCI index extended its drop to 0.3 percent. The yield on the government’s 10-year bonds declined two basis points.
Inflation was 0.7 percent last year, below the official forecast of 0.9 percent, as transport costs fell due to a blanket subsidy for gasoline, while the government is forecasting 2 percent inflation this year.
“The trajectory of headline inflation will be dependent on global oil and commodity price developments and the timing of the lifting of the domestic retail fuel price ceilings,” the central bank said in its statement. “Underlying inflation is expected to remain broadly stable, reflecting the continued expansion in economic activity and the absence of strong demand pressures.”
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