Malaysian central bank, Bank Negara cuts rates to 2 pct to support the economy to cushion the impact of the COVID-19 outbreak

Malaysian central bank, Bank Negara, on Tuesday reduced the Overnight Policy Rate (OPR) by 50 basis points to 2.00 percent, in a bid to support the economy to cushion the impact of the COVID-19 outbreak.

With the decision by the Monetary Policy Committee (MPC), the OPR has been reduced by a total of 100 basis points, complementing other monetary and financial measures by Bank Negara Malaysia as well as fiscal measures this year, the central bank said in a statement.

"Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity. The MPC will continue to monitor the outlook for domestic growth and inflation. The Bank will utilize its policy levers as appropriate to create enabling conditions for a sustainable economic recovery," said the central bank.

This was the central bank's third rate cut of the year. In January it cut the OPR rate by 25 basis point to 2.75 percent and subsequently another 25 basis point to 2.5 percent in March.

The bank will also utilize its policy levers as appropriate to create enabling conditions for a sustainable economic recovery, it added.
The central bank said global economic conditions have weakened significantly. Measures to contain the COVID-19 pandemic have disrupted economic activity across most economies. Recent indicators show that the global economy is already contracting, with global growth projected to be negative for the year.

"Financial conditions have also tightened amid elevated risk aversion and uncertainty. Substantial policy stimuli introduced by many economies, coupled with the gradual easing of containment measures globally, would partially mitigate the economic impact of COVID-19.

Growth prospects should improve in 2021 with the expected containment of the pandemic," it added.

For Malaysia, domestic economic conditions have similarly been affected by the pandemic. Widespread containment measures globally, international border closures and the consequent weak external demand environment will exert a larger drag on domestic economic activity, it noted.

"The Movement Control Order, while necessary to contain the spread of the virus, has also constrained production capacity and spending. Labor market conditions are also expected to weaken considerably. Economic conditions would be particularly challenging in the first half of the year. The fiscal stimulus measures, alongside monetary and financial measures will, however, offer some support to the economy," it said.

With more businesses allowed to operate under the Conditional Movement Control Order effected this week, the central bank said the economic activity is projected to gradually improve. The outlook for growth continues to be subject to a high degree of uncertainty, particularly with respect to developments surrounding the pandemic, it added.

The central bank said inflationary pressures are expected to be muted in 2020, with average headline inflation likely to be negative, due mainly to projections for substantially lower global oil prices.

Nevertheless, it said the outlook remains significantly affected by global oil and commodity prices, as well as evolving demand conditions. Underlying inflation is expected to be subdued given the projections of weaker domestic growth prospects and labor market conditions.

"The financial sector is sound, with financial institutions operating with strong capital and liquidity buffers. Liquidity remains ample, augmented by liquidity injections by Bank Negara Malaysia," it said.

Since March 2020, the central bank has provided additional liquidity into the domestic financial markets, via various tools including outright purchase of government securities, reverse repos and the reduction in Statutory Reserve Requirement.

"Bank Negara Malaysia stands ready to provide liquidity in the interbank market to ensure orderly market conditions, conducive to support financial intermediation activity," it added.