Bank Negara Malaysia cuts overnight policy rate by 25 bps, likely to further lower it later in year

Malaysian central bank, Bank Negara Malaysia, cut its overnight policy rate today by 25 basis points to 1.75 percent. Compared with the previous one, today’s policy statement was distinctly more optimist on growth prospects. The central bank is of the view that after a sharp contraction in the second quarter of 2020, economic activity is starting to rebound. The fiscal and monetary measures undertaken are underpinning this rebound. Improving global growth is also likely to be a tailwind, noted ANZ in a research report.

Nevertheless, there are prominent risks surrounding this central scenario, the main ones being sustained softness in the labor markets and precautionary behavior among households and businesses. Another risk is a resurgence of the pandemic which could invoke fresh containment policies.

“In our view, these risks are likely to be realised to some degree and further support from monetary policy would be useful. We accordingly, forecast another 25bp reduction in the OPR later in the year”, stated ANZ.

Inflation is likely to stay a non-issue for monetary policy. Although the statement highlights that average inflation is likely to be negative in 2020 due to lower global oil prices and underlying inflation subdued, the risk of deflation is also low.

“Therefore, our interpretation is that the currently negative inflation prints and the attendant elevated real policy rate are transitory and not a major consideration for monetary policy as we had previously assumed”, added ANZ.