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Malaysia Monetary Policy September 2020

Malaysia: Bank Negara Malaysia holds rate to all-time low in August

At its 10 September meeting, the Monetary Policy Committee of Bank Negara Malaysia (BNM) decided to maintain the overnight policy rate at its all-time low of 1.75%, amid divided market analysts’ expectations.

The Bank’s decision to pause its easing cycle was driven by signs of recovery and its assessment that the recent cuts, in combination with previous fiscal stimulus, were sufficient to reinvigorate the economy. Despite the historic 17.0% annual drop in GDP recorded in the second quarter, the Bank stressed that the reopening of production facilities has led to the gradual recovery of manufacturing and trade activity, although the recovery in the services sector was still lagging. That said, labor market weaknesses and the unpredictable trajectory of the pandemic pose downside risks to the recovery ahead. On the inflation front, BNM expects prices to fall throughout the year owing to low oil prices, before rising in 2021.

Looking ahead, the Bank struck a relatively accommodative tone in its communiqué, reaffirming its commitment to deploy any tools at its disposal to support a sustainable economic recovery. Given the uncertain outlook, with the possibility of a Covid-19 resurgence and the Bank’s expectation that inflation will remain muted throughout the year, BNM could further ease its monetary policy if necessary, to accelerate the recovery in economic activity.

With regard to the outlook for monetary policy, analysts at Nomura noted:

“We continue to forecast another 25bp policy rate cut by Bank Negara Malaysia (BNM) to 1.5% at its last monetary policy committee meeting in 2020 on 3 November. We believe yesterday’s decision to leave the policy rate unchanged at 1.75% was just a pause and does not mark the end of the rate-cutting cycle, as BNM maintained its assessment that the risks to the growth outlook are tilted to the downside and reiterated its commitment to support the recovery using all policy levers. […] We believe activity data and headline inflation will likely continue to disappoint official forecasts (as is likely already the case with the latest IP data), prompting further BNM easing.”

The next monetary policy meeting will be held on 3 November.

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