Investors increasingly expect Malaysia, Southeast Asia's last holdout against interest rate cuts, to give in to mounting economic pressure from the global trade war.
Ringgit swaps are pricing 30 basis points of easing by Bank Negara Malaysia (BNM) over the next six months, double the expectations from just a month ago. A recent auction of a three-year government bond - the most sensitive benchmark to rate expectations - received a bid-to-cover of 3.18 times, the highest since August 2024 for short-to-mid dated notes.
A cut could spur borrowing and investment, while signaling to investors that BNM is concerned about the growth outlook amid the global tariff uncertainty.
"Ringgit rates market has increased dovish bets for BNM," said Winson Phoon, head of fixed income research at Maybank Securities. Amid weaker-than-expected first quarter gross domestic product and rising global trade tensions, a rate cut would drive the three-year benchmark to outperform other parts of the curve, he added.
Maybank sees a potential 25-basis point rate cut by the end of 2025. Goldman Sachs and CIMB are also anticipating a 25-basis point easing later this year.
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Malaysia's first-quarter GDP growth of 4.4% on-year fell short of estimates, the slowest pace in a year. The inflation rate in March was the lowest in four years, with headline prices rising 1.4%.
The International Monetary Fund - which slashed its forecasts for world growth earlier this week - expects Malaysia's economy to expand by 4.1% in 2025. That's lower than the government's projection of 4.5%-5.5% growth that is currently under review.
Rising bets on rate cuts could bolster global inflows. Malaysia has seen just US$690 million ($906.85 million) of overseas investment into conventional government bonds in the first quarter, according to central bank data. In contrast, foreigners have poured about US$2.1 billion into baht bonds this month, partially on dovish wagers on the Bank of Thailand.
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Regionally, Indonesia, Thailand, the Philippines and Singapore have all eased monetary policy since 2H2024. While Bank Indonesia kept rates unchanged this week, it hinted that there was still room to resume easing.
Malaysia's central bank governor said earlier this month that officials have other policy tools to mitigate the impact of US tariffs. But investors remained unconvinced amid signs of decelerating domestic growth and inflation, as well as more US levies.
Despite US President Donald Trump's 90-day pause on tariffs for further negotiations, his tariff policy looms large over the economy. The US imposed solar tariffs on several countries this week, including a 34.4% levy on Malaysian manufacturers.
Malaysia, alongside China, Vietnam, Hungary and Mexico, "screen as most exposed to tariff turmoil" within emerging markets, Goldman Sachs strategists including Andrew Tilton and Kamakshya Trivedi wrote in a recent note.
The US was the second-largest destination for Malaysian exporters in 2024 after China, underscoring the stakes involved. Malaysia's trade minister Zafrul Aziz will meet US Trade Representative Jamieson Greer in Washington on Thursday as the country seeks relief from US tariffs.
"Malaysia is an example where the softer external environment is causing the central bank to shift its priorities to focus on the growth downside compared to the inflationary upside," said Howe Chung Wan, head of Asian fixed income at Principal Asset Management.
Chart: Bloomberg
