Malaysia May Hold Key Rate as Economy Recovers: Decision Guide

(Bloomberg) -- Malaysia is narrowly expected to keep its benchmark interest rate unchanged for the first time this year, as the reopened economy shows signs of recovery.

Bank Negara Malaysia will maintain its overnight policy interest rate at a record-low 1.75% at its meeting Thursday, according to 12 of 21 economists surveyed by Bloomberg. The other nine expect a 25 basis-point cut.

A hold would end the central bank’s string of consecutive easing decisions amid the coronavirus pandemic. Gross domestic product contracted 17.1% from a year earlier in the second quarter, its worst showing since 1998, even as the central bank cut rates at four straight meetings and the government pledged 295 billion ringgit ($70.7 billion) in stimulus.

Signs of economic recovery have emerged since Malaysia began lifting movement restrictions to contain the virus in May. GDP data showed a “sharp increase” in activity, from a 28.6% contraction in April to just -3.2% June, according to Finance Minister Tengku Zafrul Abdul Aziz. That indicates better growth in coming months, he said Sept. 4.

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

Growth Outlook

Bank Negara Malaysia projected in August that the economy would contract 3.5% to 5.5% this year, with the worst blow in the first half. This corresponded with improvements in key economic data: Malaysia saw a trade surplus of 25.15 billion ringgit in July, breaking the record set a month earlier. The unemployment rate eased to 4.9% in June from May’s historic high of 5.3%.

What Bloomberg’s Economists Say:

“Malaysia’s outlook has improved with the gradual re-opening of the economy. What’s more, fiscal space is less constrained since BNM’s last policy meeting. The government’s debt limit was lifted temporarily to 60% of GDP and the 1MDB settlement with Goldman Sachs Group Inc. provided a timely cash injection.”

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Tamara Mast Henderson, Asean economist

Since that forecast, the government has reversed gears and tightened border controls as virus cases rise. Starting Monday, it banned citizens from nations with more than 150,000 cases of coronavirus infections; on Tuesday the country saw its biggest daily jump in new cases since June.

Downside risks to the economy remain. The country’s manufacturing sector faltered in August, registering a contraction for the first time in three months as new orders fell. Weak private consumption accounted for more than half of the second quarter’s GDP contraction, according to MIDF Research, and could remain subdued going forward as the government prepares to end its blanket moratorium on loan repayments in September, in favor of targeted aid.

Policy Approach

Bank Negara Governor Nor Shamsiah Mohd Yunus has said the bank is prepared to utilize its policy levers if necessary and has room for targeted measures in case of a second virus wave.

So far this year it has cut banks’ reserve requirement ratios by 100 basis points to 2%, and allowed them to count government bond holdings toward statutory reserve requirements. Those measures have released billions of ringgit worth of liquidity into the banking system.

Inflation Trend

Consumer prices in Malaysia continued falling in July, albeit at a slower pace as declines in transport prices moderated. Full-year inflation is likely to be negative, Bank Negara Malaysia said in July.

“Downside risk to inflation remains in the event of a second wave of COVID-19 in the country, which may prompt the government to reintroduce stricter health measures, suppressing demand,” Ahmad Nazmi Idrus, an analyst at RHB Research, wrote in a note. He forecasts headline inflation at -1% for the year.

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