Malaysia Rate Cut Bets Climb Amid Virus Fallout: Decision Guide
Malaysia Rate Cut Bets Climb Amid Virus Fallout: Decision Guide
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Malaysia’s central bank will need to find the right policy mix at its meeting Tuesday to address risks from the coronavirus outbreak and a shock change in government.
More economists have shifted toward a prediction that Bank Negara Malaysia will lower its benchmark interest rate for a second time this year. Fifteen of 24 economists surveyed by Bloomberg forecast a 25 basis-point reduction, with the rest expecting no change. The median has shifted in recent days from a hold, to a split decision, and now to a majority backing a rate cut.
Officials were already struggling to bring Malaysia’s economy back to a firm footing after growth last year was the worst since 2009. The coronavirus outbreak, while relatively contained domestically, has punished the ringgit this year and weakened production. A leadership power struggle that ushered in a new prime minister over the weekend has added more uncertainty to the policy outlook.
Global central banks are starting to respond to the virus fallout following last week’s market rout. Federal Reserve Chairman Jerome Powell signaled on Friday that a U.S. rate cut could be in the cards, while the Bank of Japan issued an unscheduled statement Monday saying it will provide ample liquidity to financial markets.
Here’s what to watch for in Bank Negara Malaysia’s policy statement:
Fresh Government
Malaysia’s king on Saturday picked Muhyiddin Yassin as prime minister after a week of political turmoil. Domestic markets have been rattled by the power struggle and fears over the coronavirus, with the FTSE Bursa Malaysia KLCI Index sinking Monday to its lowest level since 2011.
The change in government adds a fresh layer of uncertainty over economic policy. Just last week, then-Interim Prime Minister Mahathir Mohamad announced a 20 billion ringgit ($4.8 billion) package of measures focused on supporting businesses affected by the virus, especially in tourism.
Despite the appointment of a new prime minister, “we opine that uncertainty remains as political priorities may continue to shift,” said Felicia Ling and Goh Khing-Mae, economists at Hong Leong Investment Bank Bhd.
Growth Outlook
Policy makers across the region have been revising down growth expectations as the virus outbreak spreads. Factory output indicators for China plunged to record lows in February, with the effects rippling to critical trading partners across Asia.
A purchasing managers’ index for Malaysia dropped in February to 48.5, notching a 16th month in contraction territory out of the last 17 readings, according to IHS Markit data.
What Bloomberg’s Economists Say
“The escalating spread of the coronavirus outside of China makes a pandemic more likely, which would weigh more heavily on global demand, oil prices and Malaysia’s export outlook. Fresh political turmoil in Malaysia is likely to deepen the year-on-year contraction in investment.”
Click here to read the report.
Tamara Mast Henderson, Southeast Asia economist
The government last week revised its official economic forecast for 2020 to 3.2%-4.2%, down from 4.8% previously. It also widened the fiscal deficit target to 3.4% of gross domestic product, from 3.2%.
Full-year growth of 4.3% for 2019 was the worst since the global financial crisis a decade ago. Central bank Governor Nor Shamsiah Mohd Yunus told reporters at the release of the last GDP report that there was “ample room” to adjust interest rates.
Benign Inflation
Consumer-price growth accelerated to 1.6% in January, the highest reading since May 2018. Even with the sharp pickup, inflation remains below its 2% average over the past five years. Bank Negara Malaysia doesn’t publicly release a target for inflation, but the governor said earlier this month that “inflation is still low.”
Malaysia’s real interest rate shows that borrowing costs adjusted for inflation are relatively high, at 1.15%, compared with central banks across Asia.
To contact the reporters on this story: Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net;Anisah Shukry in Kuala Lumpur at ashukry2@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold
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