Malaysia slashes key policy rate to avert recession

(Reuters) Malaysia’s central bank yesterday slashed its key policy rate by a surprise 75 basis points to its lowest level in over 10 years, and is expected to cut rates further in a bid to stave off recession.

The bank cut its key overnight policy rate (OPR) to 2.50 percent, and also cut its bank reserve requirement by 150 basis points to 2 percent in a move that it said was aimed at ensuring banks continued to lend money.

Analysts had expected a 25 basis point cut. The surprise move yesterday prompted some economists to say that rates here could fall as low as 1.5 percent.

Malaysia’s government is forecasting that economic growth this year will be 3.5 percent, a figure many private sector economists say is overly optimistic and the central bank recognised on Wednesday that the economy was more vulnerable.

“The sharper deterioration of the global economy is expected to have a greater impact on the Malaysian economy,” it said.

The central bank’s announcement came after the government released data showing Malaysia’s annual inflation fell to 4.4 percent in December from 5.7 percent in November, mainly due to lower fuel prices.

“With inflationary risks receding, we believe that the downside risks to growth will warrant a continuous easing of policy stance,” said Goldman Sachs’ Enoch Fung.

Fung said he now expected interest rates to stand at 1.5 percent by the end of the year as Malaysia was less vulnerable than many other countries to a currency sell-off due to its current account surplus that stood at 38.7bn ringgit ($10.70bn) at the end of the third quarter.

“We also think that to pursue an easier monetary stance now would be appropriate for Malaysia as unlike some countries in the region, its huge current account buffer would afford them the room to cut rates, without the fear of triggering currency weakness and higher inflation expectations.”

Malaysia is playing catch-up with central banks across Asia and globally. Earlier this month South Korea’s central bank cut interest rates by 50 basis points to 2.50 percent and Thailand last week cut rates by 75 basis points to 2.0 percent, a four year low.

Bank Negara cut rates at its last meeting in November by a modest 25 basis points and was earlier criticised by many economists for not hiking during an oil-induced price spike that pushed consumer price inflation to near 27-year highs of 8.5 percent last summer.

Malaysia’s growth is expected to be pressured by the weakness in exports, which fell in both October and November and are seen falling further. Exports form more than 100 percent of Malaysia’s gross domestic product.

The bulk of exports are electronics, and demand has waned due to the economic crisis. Palm and crude oil are the other key exports which have been hit by falling commodities prices.

“The contraction in global demand and trade, combined with the reduction in global commodity prices, has affected the export earnings of many of the regional economies, including Malaysia,” the central bank said.

Taiwan’s record export slump of 42 percent year-on-year in December prompted a instant rate cut of 50 basis points by its central bank earlier this month. Malaysia’s exports fell by a relatively modest 4.9 percent in November, the latest data showed.

These concerns, along with tough financial conditions worldwide, could lead to Malaysia’s first recession in eight years, some economists say.

Citibank, which sees at least another 25-50 basis points in rate cuts by the end of the second quarter, said the bank had also acted to help the Malaysian consumer and stimulate domestic demand.

“In the context of Malaysia’s indebted household sector (with debt-service at more than 40 percent of disposable income), lower interest rates would provide significant cushion for domestic demand,” said economist Kit Wei Zheng.