Malaysia’s central bank cut its benchmark interest rate by 25 basis points to the lowest on record and warned of lingering downside risks to the reopening economy, following months of lockdown to contain the COVID-19 pandemic.
The overnight policy rate was reduced to 1.75 percent, the lowest in records dating back to 2004, as predicted by 14 of 25 economists surveyed by Bloomberg.
Four had forecast a 50 basis-point cut, while seven had expected no change.
The rate cut “provides additional policy stimulus to accelerate the pace of economic recovery,” the central bank said in a statement.
Policymakers “will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth.”
Bank Negara Malaysia’s fourth straight rate cut comes hours after the Malaysian finance minister alluded to the fiscal and monetary policy space available to continue supporting the economy amid the worst unemployment in decades and three straight months of deflation.
The economy began reopening on May 4 after a lockdown meant to contain the pandemic shuttered businesses and left nearly 1 million people jobless.
Although activity is picking up, the pace and strength of recovery “remain subject to downside risks emanating from both domestic and external factors,” the central bank said.
Risks include further virus outbreaks, persistent weakness in the labor market and a weaker-than-expected recovery globally.
“The statement is dovish enough to expect more rate cuts, but cautious enough to manage expectations, as it mentions economic recovery,” Natixis SA senior economist Trinh Nguyen said in Hong Kong. “That means that we likely will have another 25 basis-point cut, but not much more, as the ringgit remains weak.”
Benchmark three-year government bonds extended gains after the decision, with yields falling 5 basis points to 2.14 percent. The ringgit held the bulk of its gains, rising 0.1 percent to 4.2758 per US dollar.
Malaysian Chief Statistician Mohd Uzir Mahidin has said that the economy is headed for recession.
The government has announced 295 billion ringgit (US$68.97 billion) in stimulus to cushion the effects of the pandemic, and is drafting a bill of economic recovery measures.
Consumer prices have been declining since March, dropping by a record-low 2.9 percent in April and May on the back of falling transport costs.
The central bank, which previously forecast inflation in a range of minus-1.5 to 0.5 percent this year, yesterday said that full-year inflation is likely to be negative.
Bank Negara Malaysia’s Monetary Policy Committee members “remain guarded as to what the future may hold,” said Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd. “The key message from the MPC is that BNM will go the extra mile in terms of monetary policy accommodation.”
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