Malaysia Cuts Rates to Record Low, Warns of Downside Risks

(Bloomberg) -- 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 a economy reopening after months of lockdown against coronavirus.

The overnight policy rate was reduced to 1.75%, the lowest in records dating back to 2004, as 14 of 25 economists surveyed by Bloomberg predicted. Four had forecast a 50 basis-point cut, while seven expected no change.

The rate cut “provides additional policy stimulus to accelerate the pace of economic recovery,” the central bank said in a statement. Policy makers “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 finance minister alluded to fiscal and monetary policy space to continue supporting the economy amid three straight months of deflation and the worst unemployment in decades. The economy began reopening May 4 after a lockdown to contain the pandemic shuttered businesses and left nearly a million people jobless.

Downside Risks

Recent indicators show activity picking up, but the pace and strength of recovery “remain subject to downside risks emanating from both domestic and external factors,” the central bank said. Risks include persistent weakness in the labor market and a tepid global recovery.

“The statement is dovish enough to expect more rate cuts but cautious enough to manage expectations, as it mentions economic recovery,” said Trinh Nguyen, a senior economist at Natixis SA 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 seven basis points to 2.09% as of 4:37 p.m. in Kuala Lumpur. The ringgit held the bulk of its gains, rising 0.1% to 4.2760 per dollar.

Malaysia's chief statistician, Mohd Uzir Mahidin, has warned the economy is headed for recession. The government has announced 295 billion ringgit ($69 billion) in stimulus to cushion the effects of the pandemic, and is drafting a bill of economic recovery measures.

What Bloomberg's Economists Say:

“Bank Negara Malaysia may pause its easing cycle for the remainder of 3Q, taking stock of its 125 bps of rate cuts and other measures so far this year, alongside nascent signs of recovery. Even so, the central bank sounds wary of prolonged economic weakness amid a highly uncertain recovery track. We expect another 25 bps rate cut in 4Q.”

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Tamara Mast Henderson, Asean economist

Consumer prices have been declining since March, dropping by a record-low 2.9% in both April and May on the back of falling transport costs. Bank Negara Malaysia, which previously forecast inflation in a range of -1.5% to 0.5% this year, said Tuesday full-year inflation is likely to be negative.

The central bank also warned of the potential for further virus outbreaks that might force authorities to restrict movement again. Tuesday's decision came hours after a six-week lockdown was imposed in Melbourne, Australia's second-largest city, amid a fresh coronavirus outbreak, and as U.S. states consider tightening restrictions again amid a resurgence of cases.

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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