- Samsul Said/Bloomberg
PETALING JAYA: There could be at least one cut in Malaysia’s benchmark overnight policy rate (OPR) in the coming months as the market braces for uncertainty from ongoing trade tensions, upcoming economic indicators as well as muted business and consumer sentiment.
This is despite lower headline inflation in April, which came in at 1.4% year-on-year (y-o-y), the same as March and lower than February’s 1.5% y-o-y rate.
Economists believe the dovish tone of Bank Negara’s monetary policy statement on May 8 sets the stage for an OPR cut.
United Overseas Bank (M) Bhd (UOB) said the market has priced in at least one cut, noting that the timing of the cut would depend on data, trade negotiations and sentiment.
The OPR has been unchanged since May 2023 after Bank Negara raised it by 25 basis points (bps).
UOB pointed to a benign inflation outlook and fading risks of inflationary pressure from subsidy rationalisation in the second-half of this year, rising downside risks to the economy, and a strengthening ringgit as reasons for the central bank’s readiness to lower interest rates.
However, the bank said the cut may not necessarily come in July despite widespread sentiment that the 100bps cut in the statutory reserve requirement (SRR) to 1% effective May 16 was a precursor to an OPR cut.
The SRR manages liquidity in the banking system by requiring banks to maintain a certain amount of liquidity in their statutory accounts.
Notably, the central bank’s next monetary policy committee meeting on July 8 and 9 coincides with the end of the United States’ 90-day pause on reciprocal tariffs.
On April 2, the United States imposed tariffs ranging from 11% to 50% on trade partners, but then suspended them on April 9. Malaysia’s reciprocal tariff rate was 24%.
All exports to the United States remain subject to a baseline 10% tariff despite the suspension of the reciprocal tariffs.
Economists also pointed to rising core inflation this year.
Maybank Investment Bank Research (Maybank IB Research) said core inflation rose to the fastest pace in 17 months in April mainly on higher prices for services and durable goods.
The research house kept its inflation forecast of 2% for the year implying upside risks coming from subsidy rationalisation, a review of the electricity tariff and higher foreign labour costs.
Maybank IB also remained mindful of Budget 2025’s proposed imposition of a higher sales tax on luxury goods and the wider scope of the service tax on business-to-business transactions, which has been delayed from a May 1 deadline.
Meanwhile CIMB Research said it expected a July rate cut of 25bps due to dimming economic growth prospects, pointing to visible slowdown in private consumption and exports in the first quarter ended March 31, and gross domestic product data signalling broad-based deceleration.
“Furthermore, the manufacturing purchasing managers’ index weakened further in April and continues to remain in contractionary territory, reflecting persistent weakness in the manufacturing activity.
“While recent export figures appeared strong, we attribute this to temporary frontloading activity during the 90-day tariff pause.
Despite ongoing trade negotiations and a potential deal with the United States, uncertainty remains elevated,” it said.
