Fitch unit predicts further cuts to Malaysia’s policy rate by end 2021 to bolster Covid-19 economy

On March 4, BNM retained its Overnight Policy Rate at 1.75 per cent and said it expects economic recovery from the second quarter of 2021 onwards. — Picture by Yusof Mat Isa
On March 4, BNM retained its Overnight Policy Rate at 1.75 per cent and said it expects economic recovery from the second quarter of 2021 onwards. — Picture by Yusof Mat Isa

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KUALA LUMPUR, March 8 — Bank Negara Malaysia (BNM) is likely to cut its key policy rate by another 25 basis points (bps) to 1.50 per cent by the end of this year, Fitch Solutions Country Risk and Industry Research said today.

The Fitch Group unit said it expects the central bank to do so as the next step to support Malaysia’s economy after the battering caused by the prolonged third-wave of Covid-19 infections that continue to drive daily cases in the four-digit zone and forced the government to bring back the movement control order (MCO) in January.

The market research company also maintained its average inflation forecast for Malaysia at 1.8 per cent year-on-year (y-o-y), and said the benign inflationary environment would enable BNM to cut interest rates further due to the lack of fiscal resources for any significant stimulus spending.

“Given that inflation is likely to remain low due to the economic disruption, BNM will be able to reduce interest rates without stoking price pressures,” it said, adding that its forecast is not conclusive as the extent of the repercussions from the MCO were not yet fully known.

On March 4, BNM retained its Overnight Policy Rate at 1.75 per cent and said it expects economic recovery from the second quarter of 2021 onwards.

Fitch Solutions predicted a softer inflation outlook for Malaysia this year, citing disruptions caused by the second MCO, adding that it may be mitigated by an expected increase in global prices of oil.

The research firm also noted Malaysia’s growing debt level to 61 per cent in the third quarter of last year and said this indicated the government would be likely to propose another fiscal injection to boost the economy again after last year’s stimulus packages.

It said Malaysia still “faces significant political uncertainty in H2021, when another general election could be called, leaving a coordinated fiscal and monetary response to any shocks even less likely. 

“Indeed, Prime Minister Tan Sri Muhyiddin Yassin has made a public promise to hold elections once the state of emergency expires and the outbreak is brought under control,” it said. 

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