BNM may move to shield economy from external headwinds, economists lean towards rate cut

• About half of 23 economists polled predict a cut from 3%, while the rest expect the central bank to stand pat.

KUALA LUMPUR (July 8): Bank Negara Malaysia (BNM) may cut interest rates for the first time in two years on Wednesday, as the central bank moves to shield the domestic economy against rising external headwinds.

The benchmark overnight policy rate (OPR) will be lowered to 2.75% at the third of the six monetary policy reviews scheduled for this year, according to the median of a Bloomberg survey. About half of 23 economists polled predict a cut from 3%, while the rest expect the central bank to stand pat.

“Bank Negara would play their role by reducing the OPR to ensure that the cost of borrowings for households and businesses is lowered, in order to encourage consumption and investment spending,” said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

Further, the government must step up with direct intervention, especially through fiscal measures, to stabilise the economy in the second half of the year, he said.

Overnight, the Trump's administration announced its decision to impose a 25% tariff on Malaysian goods, higher than the 24% reciprocal rate previously threatened, beginning Aug 1. Trump nevertheless left room to negotiate on the tariff rates.

While seen as part of a broader US negotiation tactic, economists caution the tariffs, if followed through, would drag on Malaysia’s economic growth. The central bank has already flagged potential revisions of its 4.5% to 5.5% forecast for this year.

Damage estimate

If the 25% tariff is fully enforced, the pace of Malaysia’s economic expansion could moderate to as low as 3.7% in 2025, according to estimates from Farid Burhanuddin, an economist at TA Securities.

The US has been Malaysia’s third-largest trading partner for a decade. Last year, Malaysia shipped RM198.65 billion worth of goods to the US, comprising mainly electrical and electronics products as well as machinery, equipment and parts.

Without carve-outs or exemptions, high-value industries like semiconductors would be disproportionately affected, said UOB economist Julia Goh. “While the new measures are not cumulative with existing ones, we remain cautious, particularly over tech-related exposures,” she said.

The government has said it will continue to talk to the US to address outstanding issues, clarify the scope and impact of the announced tariffs, and work towards concluding negotiations.

“Malaysia is committed to continuing engagement with the US towards a balanced, mutually beneficial, and comprehensive trade agreement,” the Ministry of Investment, Trade and Industry said in a statement in reaction to the unilateral tariffs.

The bilateral nature of the talks makes the landscape more complex than traditional free trade agreement negotiations, said Bank Islam Malaysia Bhd chief economist Firdaos Rosli.

Wiggle room

BNM nevertheless has room to pursue monetary policy easing given the benign inflation. The consumer price index — Malaysia’s main gauge of inflation — decelerated in May to its slowest pace in more than three years.

Core inflation, a measure of demand pull pressure, moderated to 1.8% in May after stripping out volatile products such as fresh food and excluding price-controlled items.

For the whole year, headline inflation is projected to remain within a moderate 2.0% to 3.5% range, thanks to moderating global costs and absence of excessive demand, BNM said in June.

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