08-07-2025
US clouds Malaysia rate path with surprise threat of 25% tariff
The surprise US decision to raise its threatened tariff on Malaysia to 25% means trade will almost certainly dominate the Southeast Asian nation's interest rate decision on Wednesday.
Analysts were split on the rate outlook before the US raised its proposed tariff from 24% in a letter Monday, with 12 of 23 economists surveyed by Bloomberg having expected Bank Negara Malaysia to reduce the Overnight Policy Rate by a quarter point to 2.75%. The rest predicted no change.
"The downside risk has become more elevated and this necessitates direct intervention from the policymakers, especially the central bank,' Mohd Afzanizam Abdul Rashid, an analyst at Bank Muamalat Malaysia, said Tuesday. "There could be 25 basis points cut in tomorrow's meeting and at the same time we are not ruling out the possibility of another round of 25 basis points cut on the horizon.'
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Malaysia, which last adjusted borrowing costs in May 2023 with a 25 basis point hike, is Southeast Asia's last holdout against interest rate cuts, and the divided economist views reflected uncertainty over the trade outlook. Negotiators had been rushing to reach a deal with the US, with Malaysia seeking a below 10% rate on sectors critical to both economies.
US President Donald Trump on Monday unveiled the first in a wave of promised letters to key trading partners, though he is still open to additional talks and pushed off the increased duties until at least Aug. 1.
Malaysia's benchmark stock index fell as much as 0.7% on Tuesday, while the ringgit underperformed most of its Asian peers, even as it was little changed in late morning trade. Officials have signaled they will keep seeking a deal.
"Malaysia is committed to continuing engagement with the US towards a balanced, mutually beneficial, and comprehensive trade agreement,' the Ministry of Investment, Trade and Industry said Tuesday.
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Policymakers had already given dovish signs. At the central bank's early May meeting, it dropped previously used language that its policy stance "remains supportive of the economy.' It also cut the statutory reserve requirement for banks to 1% from 2%, releasing roughly 19 billion ringgit ($4.5 billion) into the banking system.
Similar reductions in March 2020 and November 2019 were both followed by rate cuts, though BNM said in May that the SRR is used to manage liquidity and isn't a signal of its monetary policy stance.
Here's what to watch out for in Wednesday's statement:
Growth Risks
The central bank may unveil its fresh growth forecast for 2025 after officials said they would revise downward the 4.5% to 5.5% projection on tariff risks. The economy has slowed for three straight quarters.
Exports contracted by 1.1% in May amid trade uncertainty, while private consumption - a key driver of growth - could be dented moving forward after the government broadened its sales and service tax effective July 1. The government is also set to reduce subsidies for the country's most popular and cheapest gasoline.
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Another complication is that Trump has also threatened an additional 10% tariff on any country aligning themselves with BRICS, with which Malaysia is a partner. Prime Minister Anwar Ibrahim was in Brazil over the weekend to attend the BRICS summit.
Another risk is the Trump administration's plans to restrict shipments of AI chips from the likes of Nvidia Corp. to Malaysia and Thailand, part of an effort to crack down on suspected semiconductor smuggling into China.
Inflation Outlook
Inflation has remained persistently low in Malaysia, prompting the central bank to say it will come in below 3% this year - the government's initial forecast was for price pressures to average 2% to 3.5%.
The plan to reduce some gasoline subsidies in the second half of the year will likely have a contained impact on price pressures given that it's set to apply only on foreigners and the country's wealthiest.
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Ringgit Performance
BNM may reiterate that the ringgit's performance is primarily driven by external factors. The currency has advanced 5.5% this year against the dollar, partly as firms repatriate overseas income on the encouragement of authorities.
Still, the outlook for the currency - and economy - remains heavily dependent on any trade agreement with the US. - Bloomberg
