Malaysia's central bank keeps key rate steady as virus cases surge

Bank Negara Malaysia (BNM) held its overnight policy rate steady at 1.75%, as expected by all 13 economists in a Reuters poll.

The central bank said the latest indicators point to continued improvements in activity in the first quarter and into April, and expects fresh lockdown measures to contain the recent spike in coronavirus cases to have a "less severe" effect on the economy.

"The growth trajectory is projected to improve, driven by the stronger recovery in global demand and increased public and private sector expenditure amid continued support from policy measures," BNM said in a statement.

Malaysia is battling a fresh surge in coronavirus cases which has pushed up its tally of total cases to over 420,000 since the pandemic began, the third highest infection rate in the region behind Indonesia and the Philippines.

The jump, along with the discovery of a more infectious virus variant from India, has prompted the government to impose movement restrictions in the capital Kuala Lumpur as of Friday for two weeks, adding to lockdowns in other parts of the country.

BNM said growth is expected to be driven by a stronger recovery in global demand as well as higher public and private sector spending and activity, supported by Malaysia's COVID-19 vaccination programme. But it noted that the outlook remains subject to risks mainly tied to the pandemic.

The surge in virus cases and new containment measures will likely mean the economic recovery will be slow and fitful, according to Alex Holmes, Asia economist for Capital Economics.

"The upshot is that the BNM is likely to leave policy loose for the foreseeable future to support the recovery – we expect rates to remain on hold at 1.75% in both 2021 and 2022," Holmes said in a short note to clients.

The central bank slashed rates by a total of 125 bps in 2020 to cushion the impact of strict lockdowns. But gross domestic product still shrank 5.6%, its worst performance since the Asian Financial Crisis.

BNM, however, expects the economy to rebound by 6% to 7.5% this year, on improving export demand and a pick up in investment and production.

Shipments surged in March by 31% year-on-year, the seventh-straight month of growing demand for Malaysia's exports.