Malaysia: New governor makes his mark, Central Bank cuts rate for the first time in over seven years
July 13, 2016
On 13 July, Bank Negara Malaysia (BNM) held its fourth of six monetary policy meetings this year. This was the second such meeting under the remit of newly appointed governor Datuk Muhammad bin Ibrahim. The Bank defied market expectations and cut the Overnight Policy rate (OPR) from 3.25% to 3.00%. The Bank has not cut interest rates since February 2009, and the last change, which was an increase from 3.00% to 3.25%, took place in July 2014. The Bank stated the adjustment of the OPR is intended to support steady growth against a backdrop of low and stable inflation.
The Bank stated that, “global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom.” Like other central banks around the world that have reacted to the Brexit vote, BNM felt that it was prudent to ease its policy stance in order to shield the economy from market turmoil and uncertainty stemming from the vote. The Bank also took advantage of the delay in U.S. monetary policy normalization. With the likelihood of another rate hike by the Fed declining as Brexit fears abound, BNM had the opportunity to cuts its OPR without risking a drastic depreciation against the USD.
In earlier policy meetings, the BNM noted that inflation would peak in the first quarter of 2016 before the base effects of last year’s Goods and Service Tax kick in. Indeed, inflation in Q1 was high and prices have fallen since the first months of the year. This presents another opportunity for BNM cut the OPR and spur growth, without pushing inflation to uncomfortably-high levels.
The language of the accompanying statement differed noticeably in this meeting versus the last. Instead of claiming that the Malaysian economy was stable and well supported, the statement highlighted external risks to the economy. These risks include turmoil stemming from the Brexit crisis, but other concerns persist, such as weak external demand, slowing growth in China, and a further downturn in the prices of palm oil, rubber, hydrocarbons or other Malaysian exports.
The Bank also changed the concluding paragraph of its monetary policy statement, emphasizing that it would monitor the situation carefully. This differs from previous statements which said that the policy stance was appropriate and accommodative. Euben Paracuelles, Executive Director and Economist at Nomura, noted that this change in language could reflect a change in the BMN’s approach:
“This leaves the door open to more rate cuts and together with the fact that BNM decided to ease pre-emptively–even before the Bank of England –suggests BNM is more sensitive to downside risks materialising than we initially believed. BNM’s assessment that “the risks of destabilising financial imbalances have receded” also suggests it is no longer reluctant to cut its policy rate”
The giant question mark in the global economy right now is the Brexit. Should repercussions of the vote become more apparent, it could open the door for more easing later this year. The next policy meeting is scheduled for 7 September.
Author: Robert Hill, Economist