Bank Negara signals readiness to cut OPR

The Star

08-05-2025

PETALING JAYA: Bank Negara is playing a waiting game as it delayed a cut to its benchmark interest rate, despite cautioning that the risks to economic growth are 'tilted to the downside'.
The latest Monetary Policy Statement (MPS) sounded dovish, which according to economist Lee Heng Guie, signals Bank Negara's readiness to cut interest rates should the economy slow down significantly.
The central bank blamed the United States' tariff measures and retaliations for weakening the outlook of global growth and trade, which remains subject to 'considerable uncertainties'.
'Such uncertainties could also lead to greater volatility in the global financial markets,' warned Bank Negara in the MPS issued yesterday.
In a surprise move to help Malaysian banks deal with greater financial market volatility, Bank Negara also announced a 100-basis-point (bps) reduction in the statutory reserve requirement (SRR) to 1% from 2% earlier.
The SRR reduction, effective May 16, will release approximately RM19bil worth of liquidity into the banking system.
Bank Negara stressed that the SRR is not a signal on the stance of monetary policy and the overnight policy rate (OPR) is the sole indicator.
However, OCBC senior Asean economist Lavanya Venkateswaran noted that SRR cuts have more often than not been precursors to OPR cuts, or have at least accompanied cuts in the OPR.
'In the last easing cycle, the SRR was cut by 50 bps in November 2019, followed by a 25-bps rate cut to the OPR in January 2020. The OPR and SRR were reduced further at the March 2020 meeting,' she said.
The third Monetary Policy Committee (MPC) meeting of this year yesterday decided to keep the OPR at 3%, in line with market predictions.
Earlier, only five out of 25 economists polled by Bloomberg had forecast the OPR to be lowered to 2.75%.
The decision by Bank Negara came a day after the US Federal Reserve (Fed) paused its rate cut again at 4.25% to 4.5% as it warned of higher risks to inflation and unemployment.
'I think Bank Negara will wait for more clarity on the tariff negotiation outcome expected in July and incoming data to ascertain the impact on the domestic economy,' said Lee, the executive director of Socio-Economic Research Centre.
When asked whether there is a necessity to cut the OPR in the second half of the year, Lee said it depended on the 'hurdle rate' if the gross domestic product growth slows to below 4%.
Economist Geoffrey Williams said Bank Negara made the right decision in keeping the OPR at 3%, pointing out that the central bank needed to remain calm and steady in this period of uncertainty.
'There is, therefore, no need to cut rates now and I do not see a need in the foreseeable future for rates to be cut anytime soon.
'In fact, the Fed and most global banks are also adopting a wait-and-see stance,' he said.
Meanwhile, OCBC's Lavanya said there is a 'clear risk' that rate cuts could be brought forward to the July-December 2025 period.
At the moment, OCBC's baseline estimate is for a cumulative 50-bps cut in the OPR in the first half of 2026.
'All told, we believe Bank Negara was more dovish compared to its March 6 meeting.
'This does open the door for potential rate cuts, but the (MPS) statement does not suggest that it will come imminently,' stated Lavanya.
Williams cautioned against reacting prematurely to external developments, including by cutting key policy rates.
'We do not know the full impact of the US tariffs and since the reciprocal tariffs do not affect half of Malaysia's exports to the United States and the rest are likely to be reduced or removed, then the actual impact might not be as bad as pessimistic estimates suggest.
'We are already expecting a UK-US trade deal, with others for Japan and South Korea well underway.
'So, economic uncertainty is actually reducing although geopolitical issues in India-Pakistan, Ukraine and Gaza remain tense,' he added.
In the MPS issued yesterday, Bank Negara said the current monetary policy stance is consistent with the current assessment of inflation and growth prospects.
'Recognising that there are downside risks in the economic environment, the MPC remains vigilant on ongoing developments to inform the assessment on the domestic inflation and growth outlook.
'The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.'
The MPS noted that the latest indicators point towards continued global growth and trade, supported by domestic demand and front-loading activities.
The global growth outlook would remain supported by positive labour market conditions, less restrictive monetary policy and fiscal stimulus.
However, the tariff measures announced by the United States and retaliations have weakened the outlook on global growth and trade.
For Malaysia, economic activity expanded further in the first quarter, driven by sustained domestic demand and continued export growth.
Moving forward, the escalation in trade tensions and heightened global policy uncertainties will weigh on the external sector.
The continued demand for electrical and electronic goods and higher tourist spending, however, will provide some cushion to exports.
Overall, growth is expected to be anchored by resilient domestic demand. Employment and wage growth, particularly within domestic-oriented sectors, as well as income-related policy measures, will support household spending.
The expansion in investment activity will be sustained by the progress of multi-year projects in both the private and public sectors, the continued high realisation of approved investments, as well as the ongoing implementation of catalytic initiatives under the national master plans.
The balance of risks to the growth outlook is tilted to the downside, stemming mainly from a deeper economic slowdown in major trading partners, weaker sentiment amid higher uncertainties affecting spending and investments, as well as lower-than-expected commodity production.
Meanwhile, favourable trade negotiation outcomes and pro-growth policies in major economies, as well as more robust tourism activity could raise Malaysia's growth prospects.
On inflation, Bank Negara foresees it to remain manageable in 2025. Global commodity prices are expected to continue to trend lower, contributing to moderate cost conditions.
As for the ringgit, its performance will continue to be primarily driven by external factors.
'Malaysia's favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit,' said Bank Negara.