Yesterday, Bank Negara Malaysia (BNM) announced its decision to lower the Overnight Policy Rate (OPR) by 25 basis points (bp) from 3.25% to 3.00%. The OPR is generally the interest rate that banks use to borrow and lend from one another in the overnight market. This is the first time the central bank has cut the interest rate since July 2016.

Malaysia’s Financial Markets

Following the interest rate cut, the ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25% and 2.75%, respectively. BNM also mentioned that the baseline projection is for the Malaysian economy to grow within the projected range of 4.3% to 4.8% (The Star, 7 May).

Despite periods of volatility primarily due to global developments, the domestic financial markets have remained robust.  However, there are some signs of tightening financial conditions, although the domestic monetary and financial conditions are still supportive of economic growth. Hence, the central bank said that the objective of the OPR adjustment is to preserve the growth of monetary accommodativeness, which is consistent with the monetary policy stance of supporting steady growth path.

Bloomberg reported that Malaysia is the second Asian nation after India to lower its interest rate this year, while New Zealand and Philippines may follow suit this week.

2019 Inflation to be Broadly Stable

In terms of inflation, BNM projected that inflation will remain low in the immediate term mainly due to policy measures. Meanwhile, average headline inflation is expected to be more stable in 2019 compared to 2018. BNM mentioned that the trajectory of headline inflation will continue to be dependent on global oil prices while underlying inflation is expected to remain stable, supported by the continued expansion in economy activity and in the absence of strong demand pressures (The Edge Markets, 7 May).

Source: Macquarie Research - 8 May 2019