Malaysia to Hold Rate As Virus Uncertainty Looms: Decision Guide

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Malaysia will likely keep its benchmark interest rate unchanged Thursday as a surge in Covid infections threatens the economic recovery.

All 21 economists surveyed by Bloomberg expect Bank Negara Malaysia to hold its overnight policy rate at a record-low 1.75% for a fifth straight meeting, after it lowered rates by 125 basis points last year.

Prospects for a quick recovery have dimmed since Malaysia’s last monetary policy meeting in March as the infection rate climbed with the onset of Ramadan, leading to a shortage of ICU beds in some areas. The government on Wednesday tightened curbs on movements in the capital Kuala Lumpur to stem the rise in cases, a day after imposing similar restrictions in Selangor, its richest state.

The country is also struggling with low vaccine supplies, while detection of the Indian Covid-19 variant in Malaysia has added to the risks.

Malaysia to Hold Rate As Virus Uncertainty Looms: Decision Guide

“While we and the market do not expect the central bank to cut” the benchmark rate, “there remains a small tail risk that it might just do so,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp.

Here’s what to watch out for in Thursday’s decision:

Uneven Recovery

Bank Negara Governor Nor Shamsiah Yunus said in March she expects the economy to return to pre-Covid levels by the middle of this year. The virus’ unpredictable course could threaten that outlook, however.

Containment measures put in place earlier this year cost the economy 700 million ringgit ($170 million) a day, even as essential sectors remained open. Those measures were eased in February.

To be sure, there are signs the economy is picking up. The April manufacturing Purchasing Managers Index hit a record high, while March exports registered the strongest year-on-year growth in almost four years, according to the Statistics Department. International oil and gas prices have maintained gains and key trading partner China remains on the mend, said Tamara Mast Henderson, Asean economist for Bloomberg Economics.

What Bloomberg Economics Says...

“We hold our view that the government’s forecast for growth of 6.0%-7.5% this year is out of reach, and expect an expansion closer to 5.5%.”

Tamara Mast Henderson, Asean economist

Click here to read the full note

Policy Stance

The central bank is likely to flag some downside risks and signal that it continues to have space for further accommodative policy, according to OCBC’s Wiranto.

“Going forward, monetary policy should be on an easing bias as uncertainty continues to cloud the economic outlook,” the Asean+3 Macroeconomic Research Office wrote Tuesday. “However, the low interest-rate environment calls for vigilance against a potential build up of financial imbalances.”

In January, Bank Negara Malaysia extended banks’ ability to use sovereign bonds toward statutory reserve requirements until the end of 2022. It later announced additional funds for its targeted relief and recovery facility, established a separate disaster-relief facility and allowed non-resident banks to trade ringgit-denominated interest-rate swaps without holding underlying positions.

Inflation Surge

Consumer inflation is projected to average 2.5%-4% in 2021 after the country experienced deflation last year amid falling transport costs. Headline inflation surged to an almost three-year high in March, and the central bank expects a 5% spike in the second quarter compared to a year earlier.

Price pressures may increase this year on the back of expansionary fiscal and monetary policies, higher commodity prices and returning demand, MIDF researchers wrote April 24.

©2021 Bloomberg L.P.

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