March 3, 2020 / 7:32 AM / in a month

UPDATE 2-Malaysia's c.bank cuts key rate to 10-year low to mitigate virus impact

* Malaysia’s c.bank cuts policy rate 25 bps to 2.5%

* C.bank says rate cut to provide ‘more accommodative monetary environment’

* Further easing expected on coronavirus, political concerns - Nomura (Recast, adds economist comments)

By Joseph Sipalan

KUALA LUMPUR, March 3 (Reuters) - Malaysia’s central bank cut its key interest rate to the lowest in 10 years on Tuesday, as it aimed to soften the blow from the coronavirus oubreak on the country’s exports and tourism.

Bank Negara Malaysia (BNM) lowered its overnight policy rate by 25 basis points to 2.5%, the second reduction to its benchmark rate this year and adding to its fiscal stimulus package unveiled last week to help businesses and households.

The central bank’s monetary policy committee said the virus outbreak will weigh on Malaysia’s economy, particularly in the first quarter, and pressure full-year growth as the Southeast Asian country continues to grapple with weakness in commodity-related sectors.

“The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability,” the committee said in a statement.

Euben Paracuelles, economist with Nomura, said the cut was not likely to be the last as Malaysia confronts supply chain disruptions from the virus outbreak and political upheaval that will likely shake investor and business confidence.

Paracuelles said a good benchmark for how low the central bank can go with its interest rate is the global financial crisis, when it hit 2%.

“I think the signal is very clear, that BNM is willing to ease further...they are willing to respond as quickly as they can if the growth outlook continues to worsen,” Paracuelles said.

Tuesday’s rate cut follows a week of political turmoil, which saw Muhyiddin Yassin take over as prime minister following the resignation of 94-year-old Mahathir Mohamad.

The change of government midterm could delay some reforms and fiscal aid that markets need to soften the blow from the coronavirus outbreak, said Charu Chanana, an analyst with Continuum Economics.

The government unveiled a 20 billion ringgit ($4.76 billion) stimulus package last week to cushion the effect from the outbreak, providing tax breaks and cash aid to affected companies and households.

“I wouldn’t call it the end of easing, but we need to be a bit more cautious now because there have already been two consecutive rate cuts,” Chanana said.

“BNM has some breathing room now, but if the virus does not stabilise then we may see another cut maybe at the end of Q2 or early Q3.”

The central bank last cut its rate in January by 25 basis point, in what it described was a “pre-emptive measure” to shore up growth prospects.

Tuesday’s move comes as Australia’s central bank slashed its benchmark rate to a record low earlier in the day, and ahead of plans by the Group of Seven nations to work together to reduce the damage on the global economy from the coronavirus.

Last month, BNM reported growth of 3.6% for the fourth quarter, the country’s weakest quarterly pace since the global financial crisis. Full-year growth for 2019 came in at 4.3%, at the bottom end of the central bank’s forecast.

BNM Governor Nor Shamsiah Mohd Yunus had said then that there was “ample room” to adjust interest rates, as analysts see sustained pressure on global supply chains and tourism from the coronavirus outbreak. ($1 = 4.2050 ringgit)

Editing by Jacqueline Wong

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