Malaysia to Hold Rates as Vaccines Lift Outlook: Decision Guide
(Bloomberg) -- Malaysia is likely to keep its benchmark interest rate unchanged Thursday as a vaccine roll-out, slowing infection rate and easing of movement curbs lift the country’s economic outlook.
Bank Negara Malaysia will hold the overnight policy rate at a record-low 1.75% at its second meeting this year, according to 18 of 23 economists surveyed by Bloomberg. The rest expect a 25-basis point cut.
A vaccination drive that began last week, as well as signs the pandemic is ebbing, have sparked optimism in the government. The economy is improving, with the services, retail and construction sectors allowed to resume operating at full capacity, Prime Minister Muhyiddin Yassin said in an address Monday. The government eased restrictions in most of the country and is set to lift an inter-district travel ban Friday.
“With the steps that are being taken, the government expects the Malaysian economy to perform better this year,” Muhyiddin said. He pledged to provide more aid and support to the needy as well as struggling businesses.
These factors all lower the likelihood of a rate reduction this year, according to Joseph Incalcaterra, an economist with HSBC Holdings Plc in Hong Kong, who changed his call after earlier predicting the central bank would ease this week.
Here’s what to watch for in Thursday’s decision:
Bank Negara Malaysia Governor Nor Shamsiah Mohd Yunus recently said the central bank intends to revisit its projection of 6.5%-7.5% growth this year after the economic contraction intensified in the fourth quarter of 2020. Gross domestic product shrank 5.6% for the full year, below even the lower band of the central bank’s -3.5% to -5.5% estimate.
The economy hit further speed bumps in January, when a surge of infections forced the government to reimpose lockdowns in several states. The country has made strides since then.
“With positive elements such as vaccine distribution and expansionary fiscal and monetary policies, both demand and supply sides are expected to improve,” particularly from the second quarter onward, analysts from MIDF wrote in a note Monday.
Consumer prices in Malaysia are expected to rise by the most in Asia this year, according to a Bloomberg survey, after the country experienced deflation last year amid falling transport costs. The government capped retail prices of gasoline and diesel last month to shield consumers from recent gains in oil prices.
Still, factors such as high unemployment, weak income growth and constant disruption to the pace of economic recovery are expected to keep consumer spending weak, RHB Bank Bhd. economist Nazmi Idrus wrote in a note Feb. 24.
The central bank has room to provide further support to the economy if needed, Nor Shamsiah said last month. Still, she described monetary policy as appropriate and accommodative after the bank cut its policy rate by 125 basis points in 2020.
At its last policy meeting, 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 and established a separate disaster-relief facility.
In addition to rate cuts, the authority last year reduced banks’ reserve requirement ratios by 100 basis points and allowed them to count government bonds toward statutory reserve requirements. Those steps helped release billions of ringgit worth of liquidity into the banking system.
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