May 5, 2020 / 7:27 AM / a month ago

UPDATE 2-Malaysia cuts policy rate to 2%, loosens liquidity to nurse economy through virus

(Recasts headline and lead, adds details and analyst comments)

By Joseph Sipalan

KUALA LUMPUR, May 5 (Reuters) - Malaysia’s central bank on Tuesday slashed its key interest rate to the lowest since 2009, and left the door open for further cuts in case the trade-reliant nation’s economy suffers prolonged damage from the coronavirus pandemic.

Bank Negara Malaysia (BNM) cut its overnight policy rate by 50 basis points to 2.00% a day after the government eased six-week long curbs on movement and businesses aimed at containing the spread of the virus.

It was the central bank’s third cut in as many policy meetings, and had been widely expected by economists polled by Reuters, with the economy expected this year to suffer its worst economic performance in more than a decade.

“The Bank will utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery,” the central bank’s monetary policy committee said in a statement.

In a separate statement, the central bank also announced steps to release an estimated 16 billion ringgit ($3.72 billion) of liquidity into the banking system from May 16, by allowing banks to use government bond holding to meet their statutory reserve requirements.

In late March, the government rolled out a 260 billion ringgit stimulus package to keep the economy afloat during the partial lockdown.

Malaysia, which until mid-April had the highest number of infections in Southeast Asia, has defended its decision to relax curbs. Health authorities on Monday reported 55 new coronavirus cases, raising the total to 6,353 cases. No fresh deaths were reported, and so far 105 people have died in Malaysia.

Prakash Sakpal, an economist with ING, said the aggressive cut in interest rates was widely expected, and protracted negative growth and inflation trends this year would warrant more policy support moving forward.

“The earlier it does, the better it will be. I continue to expect another 50 bp rate cut in the next meeting in early July,” Prakash told Reuters over email.

The central bank said it expects headline inflation to be in negative territory this year, dragged down by weak global oil prices. Underlying inflation is also expected to be subdued on weaker domestic growth prospects and labour market conditions.

The central bank’s outlook for inflation opens up space for further rate cuts, but those cuts are likely to depend on how the economy fares in the second half of this year, according to Wellian Wiranto, an economist with OCBC Bank.

“The language of the MPC statement appears to be fairly constrained... expecting growth damage to be primarily a first-half issue for now. While further rate cuts can not be ruled out, it does not appear to be in its baseline for now,” Wellian said.

BNM said the outlook for growth continues to be subject to a high degree of uncertainty, “particularly with respect to developments surrounding the pandemic”.

In April, BNM said its current best estimate is for the economy to either shrink by as much as 2% or grow marginally at 0.5% this year due to the coronavirus pandemic, but stressed that “great uncertainty remains”.

The central bank had projected exports to contract by as much as 8.7% in 2020, as key trading partners struggled with the pandemic. The collapse in global oil prices has also hit Malaysia’s export earnings from liquefied natural gas. ($1 = 4.3000 ringgit) (Reporting by Joseph Sipalan; Editing by Simon Cameron-Moore)

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