BNM's surprise rate cut will curb downside risks - Economist

Bank Negara Malaysia (BNM) in a surprised move has cut the overnight policy rate by 25 basis points to 3.00 per cent, the first since 2009 to ensure the economy remains on a steady growth path.

Although it was an unexpected decision, the move augurs well for the economy as well as the financial sector which has put forward the request for sometime now.

"The decision was against consensus and expectations.

"Although we thought BNM would keep the rate unchanged this time, we had been calling for the central bank to cut rate this year for sometime," Standard Chartered Bank Head, ASEAN Economic Research, Edward Lee told Bernama.

He said the rate cut would help mitigate some downside risks to growth, even though growth was not threatening.

"In our view, fundamentals required a cut even though growth was not threatening. But we believe a rate cut will help mitigate some downside risks to growth," he added.

This is also central bank's first adjustment since July 2014.

"We believe that a 25-basis point cut will help with debt servicing rather than cause a resurge in leverage," he said.

Elaborating on its move, BNM said global growth prospects had become more susceptible to increased downside risks in light of possible repercussions from the European Union referendum in the United Kingdom.

"International financial markets could also be subject to greater volatility going forward. In this light, global monetary conditions are expected to remain highly accommodative," said the central bank.

Hence, the main reason behind the rate cut was heightened external risk as well as weaker-than-expected domestic sector, said MIDF Amanah Investment Bank Bhd Chief Economist Dr Kamarudin Nor.

"Since domestic demand is the main driver of the economic growth, BNM sees the need to intervene in the form of a rate cut to boost the domestic economy," he said.

Another reason could be due to the moderating performance of other indicators such the Industrial Production Index (IPI), loan growth and retail sales which indicate weak consumer and business sentiment going forward.

The IPI increased at a slower pace of 2.7 per cent year-on-year in May, with expansion recorded in the electricity and manufacturing sectors.

"The rate cut is poised to deliver the needed catalyst to ensure the economy is on its steady growth path. Another accommodative factor is the softer inflationary pressure as well as the current level of the ringgit," he said.

Kamaruddin believed the move would help lower the cost of fund as well as promote investment and consumer spending and eventually enhance the economic activities which would lead to an expansion in the domestic economy.

Meanwhile, International Quality Investments Chief Economist, Shan Saeed said the rate cut was a wise move as it would keep the economy in the growth mode.

"This is in line with the global economy and with what the global central banks are doing. In the next 2-3 months, the US central bank may not increase interest rate and this will be a good and tactical move on BNM's part to strenghten the economy," he said.

Commenting on Malaysia's Gross Domestic Product (GDP), Shan said a growth of more than four per cent is commendable for the country.

BNM had said before that the country's economy could expand at between 4.0 per cent and 4.5 per cent.

"A strong and stable confidence in the economy would lead to increase in investment, support aggregate demand and above all keep the structured GDP growth on the upsurge," Shan said.

The Malaysian economy had shown resilience despite strong headwinds in the global economy as the country had navigated through turbulent times with the government in total control of the economy, he added.

The Malaysian government's balance sheet was still healthy and strong, its fiscal deficit was under control while inflation was subdued, he said.

In the monetary statement, BNM said inflation was projected to be lower at 2-3 per cent in 2016, compared with an earlier projection of between 2.5 per cent and 3.5 per cent, and would continue to remain stable in 2017.

The government aims to narrow its fiscal deficit to 3.1 per cent of GDP in 2016 from 3.2 per cent last year.