The latest move is broadly in line with our view that BNM would sanction a cut in the overnight policy rate (OPR) to 3% this year, although we had expected this to occur after a scheduled meeting in July, when the monetary policy committee would have been in possession of full GDP data for the first quarter of 2019.
High-frequency data for the first few months of this year have pointed to a weakening in domestic activity, as well as very subdued inflationary pressures and external demand.
Recent declines in global financial markets—sparked largely by a ratcheting-up of US-China trade tensions in early May—probably prompted the committee to act now rather than later.
Malaysia is widely considered to be a beneficiary of the ongoing tariff war between China and the US, with demand for electronic and electrical goods set to increase modestly as foreign manufacturers re‑route orders from China to Malaysia to avoid tariffs. However, the re‑routing process has yet to have a discernible effect on monthly trade data. The value of merchandise exports declined on a year-on-year basis for a second straight month in March, although much of that was attributable to weak global commodity prices. However, we still expect merchandise exports to grow by 3.6% in 2019, supported by a mild increase in orders for electronic and electrical goods.
The 25-basis-point reduction in the OPR effectively returns monetary policy to a neutral setting that prevailed throughout 2016 and 2017. Unlike elsewhere in Asia, Malaysia's OPR is not at a record low, giving BNM scope to act. We now believe that the central bank will be keen to signal a more accommodative monetary policy stance and will move to trim the OPR by another 25 basis points in the second half of the year.