Malaysia joins Asia easing cycle with first rate cut since 2016

Bank Negara Malaysia reduced the overnight policy rate by a quarter percentage point to 3 per cent.
Bank Negara Malaysia reduced the overnight policy rate by a quarter percentage point to 3 per cent.PHOTO: REUTERS

KUALA LUMPUR (BLOOMBERG) - Malaysia's central bank on Tuesday (May 7) cut its benchmark interest rate for the first time since July 2016, seeking to support the economy as global risks mount.

Bank Negara Malaysia reduced the overnight policy rate by a quarter percentage point to 3 per cent, as predicted by 14 of 23 economists surveyed by Bloomberg. The rest forecast no change.

Policymakers in the South-east Asian nation are bracing for slower growth as exports take a knock from weaker global demand and rising trade tensions. The central bank is forecasting expansion of 4.3 per cent to 4.8 per cent this year, lower than the government's projection of 4.9 per cent.

"There are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors," the central bank said in a statement.

Asian central banks are shifting to more dovish policy stances after the US Federal Reserve pumped the brakes on rate hikes and growth outlooks soured. Malaysia becomes the second Asian nation after India to lower interest rates this year. New Zealand and the Philippines may also ease this week.

Given the tightening in financial conditions, the rate cut is "intended to preserve the degree of monetary accommodativeness", the central bank said. "This is consistent with the monetary policy stance of supporting a steady growth path amid price stability."

Exports from trade-reliant Malaysia contracted in February and March, led by declines in crude oil and palm oil shipments. Inflation remains subdued, reaching 0.2 per cent in March.

 

The ringgit weakened 1.3 per cent against the dollar in April, among the worst performers in Asia, coming under pressure from a strengthening US currency and a slump in sentiment. Outflows from bonds may worsen if FTSE Russell drops Malaysia from its global index in September.