Economists split on interest rate amid lockdown

 

Bank Negara Malaysia will announce its first interest rate decision of the year today.

KUALA LUMPUR: Malaysia’s first interest rate decision of the year is almost too close to call as surging virus cases and a lockdown threaten the country’s recovery.

Twelve economists surveyed by Bloomberg expect Bank Negara Malaysia (BNM) to keep the overnight policy rate steady today at a record low 1.75%, while 11 predict a cut of 25 basis points.

Malaysia, which has declared an emergency to curb the spread of Covid-19, has placed most of the country under a movement control order.

The mixed views illustrate BNM’s predicament as the two-week, targeted lockdown that began on Jan 13 takes a toll on the economy, leading analysts to downgrade their growth forecasts.

However, after the central bank cut rates by a total of 125 basis points last year, “conventional policy ammunition has become low enough to warrant becoming frugal” now, Bloomberg economist Tamara Mast Henderson wrote in a note on Monday.

The government unveiled a RM15 billion aid package on Monday to help people and businesses weather renewed curbs on movement. The measures, funded by a reallocation of existing budgets and more prudent spending, could buy time for the central bank before it needs to act again.

Here’s what to watch for in today’s decision:

Growth risks

Malaysia’s recovery trajectory has hit several speed bumps since the monetary policy committee last met in November. Daily virus cases have nearly quadrupled, movement restrictions are tighter, and a state of emergency declared last week – which could last until August – risks deterring investors.

The developments may prompt the central bank to revisit its 6.5% to 7.5% growth forecast for this year. Economists at Fitch Solutions, Oversea-Chinese Banking Corp, and Citigroup Inc have cut their gross domestic product forecasts, while Standard Chartered plc noted downside risks to its projection.

Policy levers

Even if it holds the benchmark rate steady, BNM could turn to other measures to alleviate the virus’ impact. After its last meeting, the bank said it “remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery”.

In addition to rate cuts, last year the authority reduced banks’ reserve requirement ratios by 100 basis points and allowed them to count government bonds toward statutory reserve requirements. Those steps helped release billions of ringgit worth of liquidity into the banking system.

Inflation rate

Consumer prices fell for a ninth straight month in November as transport costs declined. The central bank last year expected average headline inflation to rise this year, while noting that inflation would continue to be “significantly affected” by global oil and commodity prices.

Price pressures may remain contained for now as Malaysia widens areas under lockdown, weighing on consumption. The government on Monday also introduced special discounts and rebates on electricity bills, adding to downward pressure on the consumer price index. - FMT

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