MALAYSIA’S CENTRAL BANK unexpectedly cut its benchmark interest rate Wednesday, the latest emerging market to ease monetary policy amid an uncertain global economy.
Bank Negara Malaysia (BNM) reduced the overnight policy rate to 2.75%, a 25-basis-point cut predicted by only two of the 26 economists surveyed by Bloomberg. The rest expected no change.
Bank Negara is seeking to bolster Malaysia’s economy after it started showing signs of strain from the global slowdown last year. The move “is a pre-emptive measure to secure the improving growth trajectory amid price stability,” the central bank said in an e-mailed statement.
Malaysia follows emerging markets like Turkey and South Africa that kicked off the year with rate cuts. Next up is Bank Indonesia, with 29 of 34 economists expecting it to keep rates on hold Thursday, though the bank’s governor said Wednesday it will keep policy accommodative.
Emerging markets have kept relatively more space for monetary policy easing, while some of the world’s biggest economies — including in China, Japan, Europe, the UK, Canada, and India — all have negative real interest rates. That space for emerging markets could narrow this year, though, as the Federal Reserve and other major central banks are seen keeping policy on hold.
Wednesday’s move brings Malaysia’s benchmark rate to its lowest level since May 2011. The central bank 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.
In its statement, BNM 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 Muhammad Zafri Zulkeffeli, an economist at MIDF, one of the two analysts to correctly predict the rate cut. “Because the government forecasts GDP (gross domestic product) growth to be 4.8% in this year, while the consensus is lower than that, so you need something to boost the economy this year.”
Growth has shown more recent signs of recovery after a lackluster year confronting external risks. December’s manufacturing PMI signaled an expansion in factory output for the first time in 15 months. Industrial production grew at a five-month high of 2% in November from a year ago.
“It looks like BNM 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,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore.
MARKET MOVES
The ringgit gained 0.2% after the rate decision, while the benchmark FTSE Bursa Malaysia KLCI index extended its drop to 0.6%. The yield on 10-year government bonds declined three basis points Wednesday.
Euben Paracuelles, chief Asean economist at Nomura Holdings, Inc. in Singapore, was the other analyst to correctly predict Wednesday’s move. He said it was likely to be Bank Negara Malaysia’s only cut this year.
“That’s my baseline. They don’t do back-to-back cuts,” Paracuelles said. “They’ll let this feed through the economy, and then reassess after a while.”
Inflation was 0.7% in 2019, below the official forecast of 0.9%, as transport costs fell due to a blanket subsidy for petrol. The government is forecasting 2% 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.” — Bloomberg
