By Anisah Shukry

July 8, 2021

  •  BNM sees ‘significant downside risk’ amid virus restrictions
  •  Rate hold expected by 19 of 21 analysts surveyed by Bloomberg

Malaysia held its benchmark interest rate at a record low Thursday, maintaining support for the economy amid political instability and a prolonged virus lockdown.

Bank Negara Malaysia kept the overnight policy rate at 1.75%, a decision expected by 19 of 21 economists surveyed by Bloomberg. The others had expected the central bank to cut rates for the first time since last July.

The country’s economic outlook “remains subject to significant downside risks, due mainly to factors that could lead to a delay in the easing of containment measures or imposition of tighter containment measures, and a weaker-than-expected global growth recovery,” the central bank said in a statement. “Fiscal and financial measures will continue to cushion the economic impact on businesses and households and provide support to economic activity.”

The benchmark stock index extended losses after the decision and was down 1.6% as of 3:10 p.m., headed for its biggest drop in more than three months. The ringgit held earlier losses, down 0.4% to 4.1760 per dollar, while government bond yields were little changed after the decision.

Malaysia's virus cases remain elevated one month into a lockdown

Malaysia’s accelerated vaccine roll-out has allowed the government to ease virus curbs in six states, providing some breathing space to the economy. Still, much of the country remains under lockdown since June 1, and the economy is expected to fully reopen and recover only in the final quarter of the year.

The government’s limited fiscal space as well as political squabbling add to Malaysia’s woes. The country’s largest political party withdrew its support for Prime Minister Muhyiddin Yassin early Thursday and demanded he resign. Parliament is set to reopen briefly for the first time this year on July 26, with a limited agenda that includes discussion of the country’s Covid recovery plan.

State of Emergency

The state of emergency Muhyiddin implemented in January amid the pandemic has seen parliament suspended all year, while daily cases have since nearly doubled, sparking criticism of the government’s response. The country counted more than 7,000 new infections Wednesday, near its highest level in a month.

Next month Malaysia will announce a revision to its full-year growth forecast of 6%-7.5% amid the renewed containment measures. The economy lost about 1 billion ringgit daily when the lockdown was in full swing, the prime minister said last month.

The government last month unveiled 150 billion ringgit in Covid aid — its fourth package this year — including cash handouts and wage subsidies. Announcing the measures, Muhyiddin said the government’s remaining fiscal space was very limited.

Inflation moderated in May, rising a lower-than-expected 4.4% from a year earlier after April’s 4.7% gains. Bank Negara Malaysia said it expects consumer inflation to average toward the lower bound of its 2.5%-4% target range this year.

— With assistance by Y-Sing Liau, and Myungshin Cho