Bank Negara set to cut rate to record low to support reopening

KUALA LUMPUR: Malaysia is set to cut its benchmark interest rate to its lowest level on record as it seeks to support the reopening economy amid soaring unemployment and the threat of recession.

The central bank will reduce its overnight policy rate by 25 basis points to 1.75%, the lowest in records dating back to 2004, according to the median estimate of 25 economists surveyed by Bloomberg.

Fourteen analysts predict a 25 basis point cut, while four expect the bank to ease by 50 basis points; the rest project no change.

A cut would mark Bank Negara’s fourth policy easing this year, a period in which the economy has faced a triple whammy of coronavirus pandemic, low oil prices and political uncertainty.

Unemployment surged 49% in April from a year earlier, to 778,800 people, exceeding the annual average in the last 30 years, as the government imposed a three-month lockdown to curb the virus.

Malaysia began gradually reopening the economy two months ago, with chief statistician Mohd Uzir Mahidin warning in May that the country was headed for a recession.

The government has announced RM295 billion in stimulus to cushion the effects of the pandemic and is drafting a bill of economic recovery measures.

Here’s what to watch for in the central bank’s decision:

Growth estimates

Bank Negara last updated its full-year forecast for gross domestic product in April, ranging from 0.5% growth to a 2% contraction.

The central bank said in May the economy is expected to contract in the second quarter, before gradually improving in the second half of the year and recording positive growth in 2021.

Indicators point to the economy contracting in the three months through June: Exports plunged 25.5% in May, the most in 11 years, while industrial production shrank by a record 32% in April.

Stimulus measures

Stimulus spending – which includes RM45 billion of direct fiscal injection – has weighed on the government’s balance sheet amid outlook downgrades from rating agencies.

The government expects the budget deficit to nearly double to 5.8%-6% of GDP this year, while total government debt could hit its statutory limit of 55% of GDP by year-end.

Bank Negara pledged in May to “utilise its policy levers as appropriate” to aid the recovery.

So far this year it has cut banks’ reserve ratio requirement by 100 basis points to 2% and allowed them to count government bond holdings toward statutory reserve requirements.

Those measures have released billions of ringgit worth of liquidity into the banking system.

There’s still fiscal and monetary space to stimulate the economy, though Malaysia isn’t considering the sort of debt monetisation that neighbouring Indonesia has announced, Finance Minister Tengku Zafrul Aziz told Bloomberg Television.

“Should we need to have another package then we are ready to do so,” he said Tuesday, referring to stimulus moves.

But he added, “the economy is picking up, so we are quite optimistic that we perhaps would not need one anytime soon”.

Inflation trend

The inflation rate has remained negative since March, with prices dropping by 2.9% for a second straight month in May, mainly due to lower transport costs on cheaper global oil.

“We expect inflation to remain in negative territory for much of the year, given still-weak commodity prices, as well as mild demand-pull inflation as the economy shifts into the new normal,” RHB analyst Ahmad Nazmi Idrus wrote in a research note.

The central bank projects full-year inflation of -1.5% to 0.5%.