January 22, 2020 / 7:41 AM / in a month

UPDATE 2-Malaysia's c.bank cuts rates in surprise move, warns risks remain

* Malaysia’s c.bank makes surprise 25 bps cut

* C.bank says rate cut ‘pre-emptive measure’ to improve growth

* Cut likely one-and-done for the year - UOB (Adds more details, analyst comments)

By Joseph Sipalan

KUALA LUMPUR, Jan 22 (Reuters) - Malaysia’s central bank surprised markets by cutting its benchmark interest rate on Wednesday, calling it a pre-emptive move to ensure the country’s improving growth trend continues.

Bank Negara Malaysia (BNM) said it expects growth to gradually improve with support from private spending, better external demand and a modest recovery in overall investment activity but warned downside risks to growth remained.

“These include uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects,” it said in a statement.

The central bank cut its overnight policy rate (OPR) by 25 basis points to 2.75%, the lowest since March 2011.

Nearly all economists in a Reuters poll had expected BNM to keep the rate unchanged.

The central bank last cut its policy rate in May by 25 basis points, in a bid to boost growth amid concerns over flagging global demand.

Julia Goh, a Malaysia-based economist with UOB Bank, said the rate cut was earlier than expected, but will help extend the stimulus effects from the May cut and provide more support for growth over the rest of the year.

“It’s probably one-and-done for now. Going forward, whether they would consider another rate cut really depends on the growth outlook and whether any risks start to emerge,” Goh said.

Exports in November fell for a fourth month, contracting 5.5% from a year earlier, and recent palm oil curbs by India in retaliation against Malaysia’s Prime Minister Mahathir Mohamad’s criticism of Indian domestic policies, could maintain the downward pressure on shipments.


However, the government expects thawing trade tensions between the United States and China to aid growth for export-reliant Malaysia.

“Any improvement in global trade volume will increase demand for Malaysian exports, and directly boost Malaysian GDP growth,” Finance Minister Lim Guan Eng said in a separate statement on Wednesday.

Lim maintained the government’s forecast of 4.8% growth in 2020, a slight uptick from the 4.7% pace it expects to set for the previous year.

BNM may be too optimistic of its growth outlook for 2020 and will likely have to make a second cut in the second half of the year, said Alex Holmes, Asia economist for global economic consultancy Capital Economics.

“In its statement BNM noted that it ‘expects growth to gradually improve’ in 2020,” Holmes said in a note.

“In contrast, we think the economy will lose further momentum this year, with the main drag set to come from tighter fiscal policy,” he said, noting the 2020 budget is set to slash public spending by about 8%. (Editing by Jacqueline Wong)

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