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Malaysia Monetary Policy May 2019

Malaysia: BNM cuts policy rate in May for the first time since July 2016

The Monetary Policy Committee (MPC) of Bank Negara Malaysia reduced the overnight policy rate by 0.25 percentage points to 3.00% at its 7 May meeting, the first rate cut in nearly three years. Market analysts had been split on the decision, with many expecting rates to be left unchanged.

The decision to cut the overnight policy rate was mainly the result of tepid inflationary pressures and a moderate growth outlook. Although inflation returned in March following two months of annual price falls, it was still modest, while core inflation—which excludes certain types of fresh food and administered prices of goods and services—was limp. Moreover, the Bank expects inflation to remain low in the months ahead due to the price ceiling on domestic retail gasoline prices and changes to consumption tax policy. Overall, although average headline inflation should remain broadly unchanged from 2018, developments in global oil prices will largely determine the trajectory of inflation.

The Bank also highlighted downside risks to growth stemming from “heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors”, and reduced the overnight policy rate in part to support the economy.

In its communiqué, BNM gave no explicit clue as to the future direction of monetary policy, although mild inflation likely rules out a rate hike in the near term.

Commenting on the future direction of the overnight policy rate, Prakash Sakpal, an economist at ING, noted:

“Today’s rate cut still leaves the central bank with a sufficient interest rate buffer if economic conditions deteriorate further, but this may not be required. Although the GDP slowdown intensified coming into 2019 – our estimate of 4.2% growth in the first quarter puts it below the BNM’s forecast range for the year. We expect the timely policy boost together with the favourable base effect to shore up growth in the rest of the year.”

The next monetary policy meeting is scheduled for 9 July.

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