It was the first rate cut by Bank Negara Malaysia (BNM) since May 2019 when it was among the first wave of central banks to loosen their monetary policy in response to the slowing global economy alongside the Philippines, New Zealand and India.
Since May last year BNM had maintained its rate as the global pace of easing accelerated month-by-month with 67 central banks cutting rates a total of 159 times in 2019.
BNM's monetary policy committee signaled today's rate cut likely was a one-off, saying "the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability."
Economists had expected BNM to hold off on any easing until the effects of the government's fiscal tightening, aimed at lowering the deficit and debt, on consumption becomes clearer.
Although BNM was relatively upbeat about the outlook for the both the global and domestic economy, it said downside risks remain due to geopolitical tensions and policy uncertainty in a number of countries that could trigger financial market volatility and weigh on global growth.
Looking at Malaysia's economy, the central bank said economic activity in the fourth quarter of 2019 expanded moderately and growth for the year would be within the projected range and then gradually improve in 2020, with continued support from household spending, better exports and a modest recover in investments, both in the public and private sectors.
In the third quarter of 2019 Malaysia's gross domestic product grew by an annual 4.4 percent, down from 4.9 percent in the second quarter and the government has estimated 2019 growth of 4.7 percent, rising to 4.8 percent in 2020.
Last month the International Monetary Fund estimated 2019 growth of 4.5 percent and the same rate in 2020 but cautioned the risks to the growth outlook remain to the downside as continued tensions between the U.S. and China affect Malaysia's growth.
Malaysia's inflation rate averaged 0.7 percent last year, down from 1.0 percent in 2018, and BNM forecast it would rise this year but still "remain modest."
Malaysia's ringgit has been appreciating since December last year though it gave back some its gains in the last few days. But in response to the rate cut, the ringgit rose to 4.06 to the U.S. dollar to be up 0.7 percent since the start of the year.
Bank Negara Malaysia issued the following press release:
"At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 2.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 3.00 percent and 2.50 percent, respectively.
The global economy continues to expand at a moderate pace. Latest indicators and the recent dissipation of trade tensions point to improving global trade activity. Monetary easing across major economies in the second half of 2019 has helped ease financial conditions, and is expected to continue to support economic activity. However, downside risks remain due to geopolitical tensions and policy uncertainties in a number of countries. This could cause a resurgence of financial market volatility and weigh on the global growth outlook.
For the Malaysian economy, latest indicators and supply disruptions in commodity-related sectors point to moderate expansion of economic activity in the fourth quarter. For 2019, growth will be within the projected range. For 2020, growth is expected to gradually improve, with continued support from household spending and better export performance. Overall investment activity is expected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors. However, downside risks to growth remain. These include uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects.
Headline inflation averaged at 0.7% in 2019. In 2020, headline inflation is expected to average higher but remain modest. The trajectory of headline inflation will be dependent on global oil and commodity price developments and the timing of the lifting of the domestic retail fuel price ceilings. Underlying inflation is expected to remain broadly stable, reflecting the continued expansion in economic activity and the absence of strong demand pressures.
The adjustment to the OPR is a pre-emptive measure to secure the improving growth trajectory amid price stability. At this current level of the OPR, the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability."
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