Malaysia lowered its benchmark interest rate for the first time in five years, acting after US President Donald Trump increased a threatened tariff on the Southeast Asian country to 25%.
Bank Negara Malaysia cut the overnight policy rate by 25 basis points to 2.75% on Wednesday, the first easing since July 2020. Some 13 of 23 economists surveyed by Bloomberg News expected a cut, a slight increase from Monday, with the rest predicting no change.
“The balance of risks to the growth outlook remains tilted to the downside, stemming mainly from a slower global trade, weaker sentiment, as well as lower-than-expected commodity production,” BNM said in a statement. “The reduction in the OPR is, therefore, a preemptive measure aimed at preserving Malaysia’s steady growth path amid moderate inflation prospects.”
The cut marks the first change in monetary policy since May 2023, when Malaysia capped off a 12-month cycle of rate hikes. It also follows a May cut to the statutory reserve requirement for banks to 1% from 2%, which released roughly 19 billion ringgit ($5.74 billion) into the banking system.
Giving policymakers elbow room is the expectation that Malaysia’s inflation will remain moderate this year. Price pressures from global commodity prices will likely be limited, while domestic reforms are expected to have a “contained” impact, BNM said.
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The government expanded its sales and service tax starting this month, and also plans to reduce gasoline subsidies. The BNM previously said it expects inflation to average below 3% in 2025, from 1.8% last year.
“BNM continued to sound dovish,” said Lavanya Venkateswaran an economist at Oversea-Chinese Banking Corp. in Singapore, adding that she expects policymakers to ease by another 25 basis points either in September or November.
The central bank also reiterated its view for the currency, saying the ringgit performance will continue to be primarily driven by external factors. Malaysia’s currency has advanced over 5% this year against the dollar, partly as firms repatriate overseas income on the encouragement of authorities.
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“Malaysia’s favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit,” the central bank added.
BNM’s shift to easing underscores policymakers’ concerns about the impact of tariffs on sales to the US, which in April threatened a 24% rate that it raised to 25% this week.
A pause on the higher levy remains in effect until Aug. 1, though most exports to the US are already subject to a 10% tariff. The Malaysian government on Tuesday said it is “committed to continuing engagement with the US” over a trade deal.
“The MPC will continue to remain vigilant to ongoing developments and assess the balance of risks surrounding the outlook for domestic growth and inflation,” the central bank said.
The ringgit held a 0.3% drop versus the dollar, shrugging of BNM’s policy decision. The currency has strengthened 5.7% in the past three months.
“Near-term, the Malaysian ringgit may face headwinds,” said Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corp. The currency “may now be driven by tariff concerns on semiconductor, copper and pharmaceuticals given Malaysia economy’s exposure to these products in trade.”
