By CentralBankNews.info
Malaysia’s central bank lowered its policy rate for the fourth time this year, as expected by most but not all economists, saying this will provide “additional policy stimulus to accelerate the pace of economic recovery.”
Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR) by 25 basis points to 1.75 percent and has now cut it 125 points this year following earlier cuts in January, March and May.
It is also BNM’s fifth rate cut since May 2019 by a total of 150 basis points when it began easing in response to slower global growth.
In addition to cutting OPR, the central bank also lowered their ceiling and floor rates of its interest rate corridor to 2.0 percent and 1.50 percent, respectively.
The central bank’s monetary policy committee said it would “continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth” and use its policy levers as appropriate to create conditions for a sustainable economic recovery.
Although economic activity in Malaysia, as in the rest of the world, are beginning to recover from a trough in the second quarter due to fiscal and monetary stimulus, BNM said the pace and strength of this recovery remains subject to downside risks, including the prospect of further outbreaks of the pandemic and weaker-than-expected recovery in global growth.
“The impact of COVID-19 on the global economy is severe,” BNM said, noting the global economy is projected to shrink this year and broad-based weakness in labour markets and precautionary behavior by households and businesses could affect the recovery.
Malaysia’s economy slowed sharply in the first quarter as gross domestic product shrank 2 percent from the previous quarter for annual growth of 0.7 percent, the weakest since third quarter of 2009.
Consumer prices have also declined in the last three months, with deflation of 2.9 percent in both May and April.
“Inflationary pressures are expected to be muted in 2020,” BNM said, adding average inflation is likely to be negative this year, primarily reflecting lower oil prices, which will continue to affect the outlook along with commodity prices.
However, the central bank said the risks of a broad-based and persistent decline in prices is seen as limited as economic activity and demand improves.
After falling sharply from mid-January to mid-March, Malaysia’s ringgit has rebounded and has been largely steady in the last month.
Today the ringgit was trading at 4.27 to the U.S. dollar, down 4 percent this year.
Bank Negara Malaysia issued the following statement:
“At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 1.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.00 percent and 1.50 percent, respectively.
The impact of COVID-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year. Although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward. Several major economies have begun relaxing measures to contain the COVID-19 pandemic, leading to the gradual resumption of economic activity. Financial conditions have improved, although risk aversion remains elevated. Downside risks to the global outlook remain, especially if a resurgence of the pandemic necessitates the reintroduction of containment measures.
For Malaysia, economic activity contracted sharply in the second quarter of the year, due to measures introduced to contain the pandemic globally and domestically. Following the gradual and progressive re-opening of the economy since early May, economic activities have begun to recover from the trough in the second quarter. The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook. The projected improvement in the domestic economy is expected to be further supported by a gradual recovery in global growth conditions. The pace and strength of the recovery, however, remain subject to downside risks emanating from both domestic and external factors. These include the prospect of further outbreaks of the pandemic leading to re-impositions of containment measures, more persistent weakness in labour market conditions, and a weaker-than-expected recovery in global growth.
Inflationary pressures are expected to be muted in 2020. Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices. The risks of a broad-based and persistent decline in prices are assessed to be limited as economic activity resumes and demand conditions improve. Nevertheless, the outlook remains significantly affected by global oil and commodity prices. Underlying inflation is expected to be subdued and within expectations.
The reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery. The MPC will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth. The Bank will continue to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.”
