On Tuesday (5 May), the benchmark interest rate has been slashed by 50 basis points by the Malaysian central bank, Bank Negara Malaysia (BNM). This is to facilitate the bolstering of the economy during this COVID-19 pandemic.
As per the prediction of 14 of 20 economists surveyed by Bloomberg, BNM cut its overnight policy rate to 2 per cent. One economist did not predict any change whereas five had predicted a 25 basis-point cut.
Malaysia decided to reduce the rate following the footsteps of Singapore, Vietnam, and India as these countries ease the movement restriction measures so that the virus-crippled economy can be revitalised.
The Government has allowed most sectors to reopen on Monday (4 May) as roadblocks and curfews are disassembled across the country.
Most businesses are still shut down in several states, including Selangor, which borders the capital city Kuala Lumpur as the country yet registers new infected cases.
According to Malaysian Prime Minister Muhyiddin Yassin, the cost of the lockdown is estimated to be MYR63 billion, and it is tentatively set to end by Tuesday (12 May).
“Economic conditions would be particularly challenging in the first half of the year,” said BNM in its statement.
As restrictions are loosed, “economic activity is projected to gradually improve” as BNM remarked, while it highlighted “a high degree of uncertainty” about the outlook.
Following the policy statement, ten-year Government bonds showed higher yields but the ringgit remained steady at MYR4.3160 per US dollar.
In March, consumer prices dropped for the first time in more than a year. Prices declined 0.2 per cent year-on-year due to the lower transport costs amid Malaysians staying at home.
This figure is within the inflation estimate of BNM in average -1.5 per cent to 0.5 per cent in 2020 against the backdrop of lower global oil and commodity prices.
According to Mohd Afzanizam Abdul Rashid, Bank Islam Malaysia Bhd Chief Economist, low inflation gives room to further cut rates, but BNM should monitory how the previous cuts’ impact ripples through the economy.
BNM noted that it vows to “utilise its policy levers as appropriate” to promote the recovery, adding that monetary easing, fiscal spending, and regulatory measures will provide some support to the economy.
On Tuesday, banks have also been allowed by BNM to consider Government bond holdings in their statutory reserve requirements.
Similarly, its neighbouring country, Singapore also slashed rate in March.
Singapore’s central bank, the Monetary Authority of Singapore (MAS), lowered the currency band to zero as part of monetary easing. This meant that appreciation pace is slower than before but the fluctuation of the SGD is not limited because the width of the band still remains the same.