Malaysia Slowdown Is Test for New Governor as Some Eye Rate Cutby
Ringgit is worst in Asia this quarter after earlier gains
Muhammad takes over from Zeti who helmed bank for 16 years
In his first interest-rate meeting as governor of Malaysia’s central bank, Muhammad Ibrahim must grapple with how to provide more stimulus to a slowing economy facing currency volatility and political tensions.
While most economists predict Bank Negara Malaysia to keep its benchmark interest rate unchanged at 3.25 percent on Thursday, the case is starting to build for an easing in policy. The rate of loan growth has eased to levels not seen since at least 2008 and the economy is forecast to expand at the slowest pace in seven years in 2016.
“It’s a difficult global environment for any central bank governor,” said Edward Lee, regional head of research at Standard Chartered Plc in Singapore, who is expecting a rate cut on Thursday. Malaysia’s growth conditions have deteriorated and "the current monetary policy may not be that appropriate," he said.
As a former deputy governor and holding a master’s degree from Harvard University, Muhammad’s appointment last month as a successor to Zeti Akhtar Aziz triggered a bounce in the currency and stocks -- but that was short-lived. As a net oil exporter, Malaysia has been hit by a two-year slump in energy prices, while China’s slowdown has cut demand from its second-biggest export market.
The ringgit has see-sawed amid the uncertain economic outlook, turning Asia’s best performance in the first three months of 2016 to the region’s worst in the current quarter. The currency was down 0.6 percent at 4.0735 per dollar as of 9.57 a.m. in Kuala Lumpur, according to prices from local banks compiled by Bloomberg.
Muhammad, who was born in 1960, has pledged monetary and financial stability to a nation that’s endured more than a year of market volatility and political tensions over funding scandals involving Prime Minister Najib Razak and alleged financial irregularities at a state investment company. The premier and the government fund have consistently denied wrongdoing.
"The new governor will take this opportunity to at least put across that the global environment is rapidly evolving with some downside risks but not one in which he wants to prematurely make a policy move at the risk of broader stability," said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore. "The balance of risks would point to some scope to accommodate rather than not. But this will remain quite contentious."
The yield on the benchmark 3-year government bond is below the central bank’s overnight rate. The implied policy yield curve indicates expectations of an easing by policy makers in the next year, while six of 25 economists surveyed by Bloomberg expect a rate cut next quarter. Only one of the 21 analysts in a separate Bloomberg survey is predicting a reduction on Thursday.
While Bank Negara hasn’t reduced the key rate since 2009, it cut the statutory reserve requirement ratio in February. That released 5 billion ringgit ($1.2 billion) to 6 billion ringgit of liquidity, or about 0.3 percent of total deposits, into the banking system, according to Australia & New Zealand Banking Group Ltd.
The three-month Kuala Lumpur Interbank Offered Rate at which lenders charge each other for short-term loans has fallen 20 basis points to 3.67 percent since reaching an eight-year high in December 2014.
“The tightness in liquidity conditions could return if the downside risk to growth does materialize,” said Weiwen Ng, an economist with ANZ in Singapore. “If you see growth undershooting, if you see further tightening in the banking system liquidity, then definitely there could be risks of further overnight policy rate cuts or even statutory reserve requirement cuts.”