Malaysia cuts rate 25 bps to maintain easy conditions

8th May 2019 Off By binary

By CentralBankNews.info
Malaysia’s central bank lowered its benchmark Overnight Policy Rate (OPR) by 25 basis points to 3.0 percent, as expected, saying the rate cut was “intended to preserve the degree of monetary accommodativeness” after signs of tightening of domestic financial conditions.
It is Bank Negara Malaysia’s (BNM) first rate cut since July 2016, which came in the wake of the UK’s Brexit decision, and reverses the similar-sized rate hike in January 2018 when BNM responded to strong global growth, which also triggered tighter monetary policy worldwide.
But since then growth worldwide and in Malaysia has slowed and inflation decelerated.
While global growth was better than expected for several major economies in the first quarter of this year and economies continue to expand moderately, BNM said there were still “considerable downside risks” from unresolved trade tensions and prolonged country-specific weaknesses in major economies that is dampening global trade and investment.
“Although the tightening in global financial conditions has eased somewhat, heightened policy uncertainties could lead to sharp financial market adjustments, further weighing on the overall outlook,” BNM said.
BNM confirmed its forecast from March BNM for Malaysia’s economy to grow 4.3 – 4.8 percent in 2019 but said data point toward “moderate economic activity” in the first quarter and slowing global demand and subdued growth in key trading partners is weighing on its export industry.
In March BNM lowered its 2019 growth forecast from its previous forecast of 4.9 percent and compared with 4.7 percent in 2018. In March the International Monetary Fund forecast 4.7 percent this year and 4.8 percent in 2020.
A decline in Malaysia’s inflation rate has given BNM room to ease its policy, with headline inflation only 0.2 percent in March, following two months of outright deflation, mainly due to a fall in transport prices from lower global oil and changes in consumption tax.
BNM confirmed its outlook for average headline inflation this year to be broadly stable from last year’s average rate of 1.0 percent, down from 3.7 percent in 2017, with oil prices affecting the trajectory. The IMF has forecast 2.2 percent inflation this year and 2.6 percent in 2020.
Malaysia’s inflation has also been affected by last year’s replacement of the tax on goods and services (GST) with the narrower-based sales and services tax (SST), a process that included a 3-month tax holiday to help boost economic growth.
Underlying inflation is also seen stable, supported by continued economic growth and the absence of strong demand pressures, with the price ceiling on domestic retail fuel prices affecting prices until mid-2019 along with changes in the consumption tax policy.
Since April last year Malaysia’s ringgit has depreciated and fell sharply in response to the rate cut before bouncing back to be largely unchanged.
The ringgit was trading at 4.15 to the U.S. dollar today, unchanged since the start of the year.

 

Bank Negara Malaysia issued the following statement:

“At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 3.00 percent. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25 percent and 2.75 percent respectively.
 
The global economy continues to expand moderately. While growth outcomes for several major economies were better than expected during the first quarter, underlying economic conditions continue to suggest moderation going forward. Considerable downside risks to global growth remain, stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies, further dampening global trade and investment activities. Although the tightening in global financial conditions has eased somewhat, heightened policy uncertainties could lead to sharp financial market adjustments, further weighing on the overall outlook.
 
For Malaysia, latest developments point towards moderate economic activity in the first quarter of 2019. Looking ahead, slowing global demand conditions and subdued growth of key trading partners will continue to weigh on the external sector. Domestically, stable labour market conditions and capacity expansion in key sectors will continue to drive household and capital spending. The baseline projection is for the Malaysian economy to grow within the projected range of 4.3% – 4.8%. However, there are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.
 
Headline inflation increased to 0.2% in March 2019 (February: -0.4%), due mainly to the less negative transport inflation at -3.0% (February: -6.8%). Underlying inflation, as measured by core inflation[1], remained stable at 1.6% in March 2019. In the immediate term, inflation is expected to remain low mainly due to policy measures. These include the price ceiling on domestic retail fuel prices until mid-2019 and the impact of the changes in consumption tax policy on headline inflation. For 2019 as a whole, average headline inflation is expected to be broadly stable compared to 2018. The trajectory of headline inflation will continue to be dependent on global oil prices. Underlying inflation is expected to remain stable, supported by the continued expansion in economic activity and in the absence of strong demand pressures.
 
The domestic financial markets have remained resilient, despite periods of volatility primarily due to global developments. While domestic monetary and financial conditions remain supportive of economic growth, there are some signs of tightening of financial conditions. The adjustment to the OPR is therefore intended to preserve the degree of monetary accommodativeness. This is consistent with the monetary policy stance of supporting a steady growth path amid price stability. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

1] Core inflation is computed by excluding price-volatile and price-administered items. It also excludes the estimated direct impact of consumption tax policy changes.”

    www.CentralBankNews.info

 

Read more and Click Here To Get Started