By Danial Azhar
KUALA LUMPUR (Reuters) – Malaysia’s central bank kept its benchmark interest rate steady on Thursday but warned of weaker economic growth due to trade tensions, which analysts say will lead to rate cuts later in the year.
The dovish policy outlook was reinforced when the central bank said it will lower banks’ statutory reserve requirement (SRR) ratio by 100 basis points to 1.00%, effective May 16 – the first SRR reduction since March 2020 at the start of the COVID-19 pandemic.
Earlier in the day, Bank Negara Malaysia maintained its overnight policy rate (OPR) at 3.00%, where it has been since May 2023, as had been expected by 24 of 30 economists in a Reuters poll.
While the economy had performed well in the first quarter, the balance of risks to the growth outlook was tilted to the downside due to an expected slowdown in major trading partners, weaker spending and investments, as well as lower-than-expected commodity production, the central bank said in a statement.
“The tariff measures announced by the U.S. and retaliations have weakened the outlook on global growth and trade,” the central bank said, adding the outlook remained subject to considerable uncertainties, including trade negotiations and geopolitical tensions.
The median forecast in the Reuters poll ahead of Thursday’s decision was for BNM to begin cutting interest rates in the final quarter of this year. Inflation fell to a four-year low of 1.4% in March and advance estimates showed the economy grew 4.4% in the first quarter.
Last month, the central bank said the global trade war means it will have to lower this year’s forecast economic growth range of 4.5% to 5.5%.
On its decision to cut the SRR, BNM said in a separate statement that the move will release approximately 19 billion ringgit ($4.45 billion) worth of liquidity into the banking system.
The prospect of a slowdown in growth and with inflation concerns easing, the central bank had plenty of room to cut rates later this year, Capital Economics said in a note.
“We think the policy rate will end the year at 2.50%,” the group’s senior Asia economist, Gareth Leather, said.
TRADE HEADWINDS
The ringgit currency was unchanged after the interest rate decision, and was last down about 0.8% against the dollar.
BNM said the escalation in trade tensions and heightened global policy uncertainties will weigh on the external sector, but demand for electrical and electronic goods and higher tourist spending will provide some cushion to Malaysia’s exports.
Other Asian central banks, such as Bank Indonesia, the Bank of Korea, the Bank of Thailand and the Philippine central bank, have cut rates more than once to support growth.
Prime Minister Anwar Ibrahim said this week that the suspension of most of the U.S. tariffs until July meant the economic impact was manageable for now, but Malaysia was unlikely to meet its growth forecast this year.
Malaysia is facing a 24% tariff rate on its exports to the U.S. from July, unless it is able to negotiate a reduction of the levy.
BNM said headline and core inflation averaged 1.5% and 1.9% in the first quarter of 2025, respectively, adding that it expects consumer prices to remain manageable this year, amid moderate global cost conditions and the absence of excessive domestic demand pressures.
The central bank projects headline inflation to range between 2% to 3.5% in 2025, and core inflation at 1.5% to 2.5%. Both headline and core inflation came in at 1.8% in 2024.
($1 = 4.2700 ringgit)
(Reporting by Danial Azhar; Editing by John Mair)
