KUALA LUMPUR: The lowered overnight policy rate (OPR) by 25 basis points (bps) to 2.75% is a pre-emptive strike amidst continued uncertainties from the ongoing US-tariff drama that is still unfolding.
As an export-dependent economy, economists said the central bank’s Monetary Policy Committee (MPC) had to act now before its next meeting on Sept 4 to prevent any potential downsides to the economy.
The move is expected to encourage domestic consumption as lower interest rates will provide relief to borrowers by reducing lower monthly repayments on existing loans and further encourage new borrowings.
This will help boost spending among businesses and consumers eventually.
But despite this cut, a high degree of uncertainty still clouds the overall economic outlook since the United States is Malaysia’s second-largest trading partner and largest export destination.
The cut in the OPR came a day after US President Donald Trump announced a 25% tariff on Malaysian exports to the country.
As total trade with the United States rose in 2024 by almost 30% to US$71.4bil, it would be in Malaysia’s best economic interest to place the highest priority now to secure a positive outcome in trade talks with the United States.
Trump had indicated in his latest statement that there would be no further extensions to the Aug 1 deadline to secure a trade deal, meaning there is another three weeks to secure one.
Malaysia’s OPR had remained unchanged at 3% since May 2023.
Explaining the move, Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour told Bernama in an interview that the MPC’s decision will always be guided by its mandate to maintain price stability that’s conducive to sustainable growth, premised on the outlook of the country’s growth and inflation.
“However, the balance of risks to Malaysia’s growth outlook remains tilted to the downside, stemming mainly from slower global trade, weaker sentiment and lower-than-expected commodity production. To reflect the latest assessment, we plan to release the revised gross domestic product (GDP) growth forecast 2025 in the fourth week of July,” Abdul Rasheed said.
“I would like to emphasise that we do not foresee a major revision. The updated figures will take into account the latest economic indicators and developments surrounding trade negotiations,” he added.
Moving forward, Abdul Rasheed said the central bank expects domestic demand to continue being the key driver of growth as employment and wage growth, particularly within domestic-oriented sectors, alongside income-related policy measures, will support household spending.
Socio-Economic Research Center’s executive director Lee Heng Guie said Bank Negara’s move was not unexpected, given the weaker sentiment.
“If Bank Negara doesn’t do small cuts now, it can put pressure on the economy to further slow down in a month from now – after Aug 1. I believe Bank Negara doesn’t want to take that risk with the prevailing situation of the US-tariff talks that are still hanging in the balance,” Lee told StarBiz.
“A rate cut now doesn’t immediately boost the economic outlook but it softens the blow of any further potential slowing of the economy moving forward. At the moment, the OPR cut is sufficient as a pre-emptive move to soften any blows to the economy,” he added.
He also noted the tariff uncertainty came after the scope of the sales and service tax (SST) had expanded and just begun to take effect at the beginning of this month.
“The government should not front-load policy measures and SST changes, leading to increased costs on businesses, and if these costs are unabsorbed, they would eventually be passed ont o the households. This comes at a time of heightened tariff uncertainty,” Lee said.
Sunway University’s professor of economics Yeah Kim Leng said the rate cut can prop up the weakening domestic demand that has been facing downside pressures due to geopolitical and tariff uncertainties that continue to weigh down on consumer and investor sentiment.
“As consumers and corporates turn more cautious, it is also timely for government to step up spending and disbursement, especially for budgeted allocations. The government could also encourage government-linked companies and government-linked investment companies to continue their spending and investment plans while facilitating the roll-out of approved domestic and foreign investments,” Yeah said.
“It is also timely to look at ways and means to promote startups and entrepreneurial activities and fast-track the implementation of planned projects,” Yeah added.
Economists appear to be divided on their views if there will be further rate cuts ahead.
OCBC Research’s senior Asean economist Lavanya Venkateswaran did not discount further rate cuts moving forward in Bank Negara’s future MPC meeting in September and November.
“We do not believe this ‘one and done’ and expect another 25-bps cut either at the Sept 4 or Nov 6 meeting. We note that Bank Negara was clear that ‘the balance of risks to the growth outlook remains tilted to the downside’ despite the latest activity data pointing towards ‘continued growth in economic activity in the second quarter’,” Lavanya said.
MIDF Research, on the other hand, said there are no further OPR cuts that will be needed moving forward.
“In our view, Bank Negara is undertaking pre-emptive measures in response to anticipated GDP growth moderation in the second half of the year due to a potential 25% tariffs by the United States. This policy easing also aims to support domestic consumption and investment activities,” MIDF Research said.
“We do not believe this signals the start of a rate-cutting cycle in the near term, given the still encouraging spending activities in the domestic economy and healthy labour market situation. We opine that targeted support to assist specific industries will be a better approach moving forward instead of further OPR adjustments, at least for the rest of the year,” it added.
Historically, MIDF Research said Bank Negara will only reduce the OPR below the 3% level during economic crises and that the rate cut brings the interest rate to be slightly below the normal rate.
“On a separate note, we expect the ongoing downwards pressure on the Malaysian Government Securities (MGS) market would gradually ease, and therefore the spreads between the MGS yields and the OPR will also normalise,” it added.
On whether there would be another OPR cut this year, Abdul Rasheed said: “Let me preface by saying that our monetary policy decisions remain guided by the MPC’s assessment of Malaysia’s outlook for growth and inflation. The MPC sees today’s decision as a pre-emptive cut to preserve a steady economic growth path in the face of global uncertainties.”
“The MPC is not on any pre-set course. Future policy decisions will continue to be guided by the evolving outlook for domestic growth and inflation,” he added.
