Malaysia Seen Holding Key Rate in Dovish Pause: Decision Guide

(Bloomberg) -- Malaysia is expected to keep its key interest rate unchanged for a second straight meeting as political instability and a resurgence in virus infections threaten the nascent economic recovery.

Bank Negara Malaysia will hold its overnight policy rate at 1.75% Tuesday at its final review of the year, according to 17 of 22 economists surveyed by Bloomberg. The others expect a 25-basis point reduction.

While Malaysia’s economy is recovering -- exports rose at the fastest pace in almost two years in September -- businesses face renewed risks since the central bank’s last review in September. About 20,000 new virus cases were recorded in the past month, almost double the number logged in the prior six months, Prime Minister Muhyiddin Yassin said Saturday.

“Political uncertainty and social distancing curbs could cool consumer and business sentiment,” CGS-CIMB analysts Michelle Chia and Lim Yee Ping wrote in a note.

The nation’s virus woes have coincided with dramatic political shifts, which are set to intensify as lawmakers reconvene this week. Muhyiddin’s razor-thin majority will be put to the test after the government presents its 2021 budget in parliament Friday, amid discontent from the premier’s biggest ally.

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

Growth Outlook

The central bank has forecast the economy to contract 3.5% to 5.5% this year, an outlook threatened by fresh curbs on movement in states including Selangor, the nation’s industrial powerhouse, and Sabah, the top palm-oil producer.

The restrictions may hurt business activity in October and November, Economy Minister Mustapa Mohamed said in parliament Monday, adding the economy may expand 5.5% to 8% in 2021, he said.

“Whatever the official guidelines may be, Malaysians may shy away from crowds on contagion fear once again, hitting consumer spending,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp.

Policy Approach

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

So far this year the authority has slashed the benchmark rate by 125 basis points, reduced banks’ reserve requirement ratios by 100 basis points and allowed them to count government bonds toward statutory reserve requirements. Those measures have released billions of ringgit worth of liquidity into the banking system.

Inflation Trend

Consumer prices fell for a seventh straight month in September on a decline in transport costs. The central bank expects average headline inflation for the year to be negative.

Prices are unlikely to pick up for the rest of the year as a contraction in real GDP, low global oil prices, reduced toll rates and electricity-bill discounts will keep price pressures in check, said BIMB Securities Research analyst Imran Nurginias Ibrahim.

©2020 Bloomberg L.P.