Malaysia Cuts Key Rate by Most Since 2009 as Economy Reopens

(Bloomberg) -- Malaysia cut its benchmark interest rate by 50 basis points, the most since early 2009, as it seeks to bolster its newly reopening economy amid the coronavirus pandemic.

Bank Negara Malaysia slashed its overnight policy rate to 2%, as predicted by 14 of 20 economists surveyed by Bloomberg. Five had forecast a 25 basis-point cut, while one expected no change.

The central bank's “outlook on the economy remains gloomy as Covid-19 and lockdowns continue to squeeze demand and economic activity,” said Maximillian Lin, emerging-markets Asia strategist at NatWest Markets in Singapore. “After the oil price collapse in April, Malaysia must now grapple with a weaker commodities export outlook on top of the impact from domestic social distancing measures. Further BNM cuts are likely.”

The decision comes as Malaysia joins nearby India, Singapore and Vietnam in easing movement curbs to revive an economy battered by the virus. Most sectors were allowed to reopen Monday as the government lifted curfews and dismantled roadblocks around the country.

Some states including Selangor, which borders the capital Kuala Lumpur, are still keeping most businesses closed as the country continues to register new infections. The lockdown has cost Malaysia an estimated 63 billion ringgit ($14.6 billion), according to Prime Minister Muhyiddin Yassin, and is set to end fully by May 12.

“Economic conditions would be particularly challenging in the first half of the year,” the central bank said in its statement. “Economic activity is projected to gradually improve” as restrictions are eased, the central bank said, while noting “a high degree of uncertainty” about the outlook.

Ten-year government bonds extended their gains after the policy statement, while the ringgit was steady at 4.3160 per dollar. Malaysia's stock index extended gains, climbing 1.4% as of 3:44 p.m. in Kuala Lumpur.

Benign Inflation

Consumer prices declined in March for the first time in more than a year, dropping 0.2% from a year earlier on the back of falling transport costs as Malaysians stayed home. That's within the central bank's estimate for inflation to average -1.5% to 0.5% this year on lower global oil and commodity prices.

Weak inflation provides space to further lower rates, though the central bank should wait to see how previous cuts filter through the economy, said Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd.

“Thus far the inflation rate is expected to be very low, and therefore room for further policy accommodation is wide open,” he said, while cautioning that the Overnight Policy Rate “should stay where it is at least until the next meeting in July. The situation is very fluid.”

Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore, said that with future rate moves depending on data -- and the central bank seeing brighter growth prospects next year -- he expects the benchmark rate to still be at 2% at year-end.

In its statement, the central bank said fiscal stimulus, monetary easing and regulatory measures “offer some support to the economy,” and pledged to “utilize its policy levers as appropriate” to aid the recovery.

Also Tuesday, Bank Negara Malaysia said it would allow banks to count government bond holdings toward their statutory reserve requirements.