Malaysia Holds Key Rate at Record Low as Virus Threatens Growth

Malaysia’s central bank held its benchmark interest rate at a record low Tuesday, while warning of downside risks from the pandemic that threaten the economy’s recovery.

Bank Negara Malaysia held its overnight policy rate at 1.75% at its final scheduled meeting of the year, as expected by 17 of 22 economists surveyed by Bloomberg. The rest had predicted a 25-basis point cut.

It’s the second straight meeting that the central bank has held pat after lowering its benchmark rate by 125 basis points from January to July. The economy began to show signs of recovery at the end of the second quarter, when it contracted by the most in more than two decades.

Malaysia Holds Key Rate at Record Low as Virus Threatens Growth

The “latest indicators point toward significant improvement in economic activity in the third quarter,” the central bank said in a statement, though it warned “the overall outlook remains subject to downside risks,” mainly from a resurgence in Covid-19 cases.

The bank described its current policy as “appropriate and accommodative” and said it “remains committed to utilize its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.”

What Bloomberg Economics Says...

“As the central bank remains wary of downside risks from the uncertain course of the pandemic, rate cuts can’t be ruled out for 2021. Our base-case expectation, though, is that BNM will leave its policy rate unchanged next year. This assumes a vaccine will be approved in 1Q and increasingly distributed over the remainder of the year.”

-- Tamara Mast Henderson, Asean economist

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The ringgit was little changed at 4.1543 to the dollar at 4 p.m. in Kuala Lumpur, while the country’s main stock index reversed earlier losses.

A new wave of infections that emerged in late September risks stunting Malaysia’s recovery. A state election that month fueled a nationwide resurgence of the virus, leading to renewed restrictions on movement across several states. Efforts to contain the pandemic may hurt economic performance in October and November, Economy Minister Mustapa Mohamed said Monday.

Open Door

Bank Negara Malaysia “has basically left the door open for a rate cut, not now but later,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. Much will depend on third- and fourth-quarter GDP results, the impact of renewed mobility restrictions at home and abroad, “and how global markets react to the upcoming U.S. election results -- or lack thereof -- this week.”

The central bank on Tuesday affirmed an earlier forecast for the economy to contract by 3.5% to 5.5% this year. The bank said it expects average headline inflation to be higher next year, while underlying inflation will remain subdued due to spare capacity in the economy.

Capital Economics, in a note after the decision, predicted the central bank would cut rates by an additional 50 basis points next year. HSBC Holdings Plc, for its part, predicted one more cut early in 2021.

“Although the tone of the latest statement is relatively neutral, the central bank continues to signal a willingness to act should further downside risks to growth or inflation materialize,” said Joseph Incalcaterra, HSBC’s chief Asean economist in Hong Kong. He added that a possible rate cut in the first quarter of the year would be “highly contingent on the trajectory of the current wave of infections and the corresponding restrictions.”

©2020 Bloomberg L.P.

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