Malaysia Unexpectedly Cuts Rate to Shield Growth as Risks Mount

  • Inflation forecast lowered to 2 percent to 3 percent
  • Economy set to grow at slowest pace in seven years in 2016

Malaysia’s new central bank Governor Muhammad Ibrahim unexpectedly cut interest rates for the first time in seven years, joining Asian counterparts from Indonesia to Taiwan in easing policy as global risks mount.

In his second rate-setting meeting since taking office two months ago, Muhammad lowered the overnight policy rate by 25 basis points to 3 percent, a decision that came as a surprise to all but one of the 18 economists surveyed by Bloomberg.

Muhammad Ibrahim

Photographer: Manan Vatsyayana/AFP/Getty Images

“Bank Negara Malaysia is one of the more esteemed central banks in this region, insofar as they’re always acting ahead of the curve,” Weiwen Ng, an economist with Australia and New Zealand Banking Group Ltd. in Singapore, said by phone. Policy makers had room to adjust now because of “the delay in the Fed hikes and the space provided by the low inflation trajectory in Malaysia,” he said.

Muhammad has faced increasing pressure to lower borrowing costs to spur an economy projected to expand at the slowest pace in seven years amid falling oil revenue and weaker exports. The U.K.’s surprise decision last month to leave the European Union has clouded the global growth outlook, denting demand for Malaysian goods.

Lower oil costs and subdued global price pressures enabled the central bank to cut its inflation forecast for this year to 2 percent to 3 percent from 2.5 percent to 3.5 percent, it said. Consumer prices rose 2 percent in May from a year ago.

Muhammad’s predecessor, Zeti Akhtar Aziz, had kept the benchmark rate unchanged since July 2014, when it was raised by 25 basis points.

The rate cut “is intended for the degree of monetary accommodativeness to remain consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation,” Bank Negara Malaysia said in a statement.

The ringgit closed 0.2 percent stronger at 3.9710 per dollar in Kuala Lumpur, taking its gain this year to 8.1 percent, the best performer in Asia after Japan’s yen. Yields on the three-year government bond dropped eight basis points to 2.97 percent. The 10-year yield fell nine basis points to 3.6 percent, the lowest for a benchmark of that maturity since April 20.

“Given the relatively dark tone of its statement today, the chance of further rate cut is inescapably there,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. The central bank will probably adopt a wait-and-see attitude in the next policy meeting in September to gauge the global economy conditions before another potential cut in November, he said.

Reza Siregar, the Goldman Sachs Group Inc. economist who correctly predicted Wednesday’s decision, wasn’t immediately available when contacted by Bloomberg. He wrote in a report before the decision that BNM had room to take pre-emptive action because of limited price pressures, a weaker-than-forecast growth outlook and expectations for gradual policy tightening in the U.S.

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