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Bank Negara cuts overnight policy rate by 25bps to 1.75%

July 10, 2020

Bank Negara Malaysia's monetary policy committee has cut the overnight policy rate (OPR) rate by 25 basis points to 1.75% as it expected the reduction to help speed the economic recovery.

It said on Tuesday the ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2% and 1.50%, respectively.

“The reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery, ” it said, adding that economic activity contracted sharply in the second quarter of the year.

It attributed the contraction due to measures introduced to contain the pandemic globally and domestically.

“Following the gradual and progressive re-opening of the economy since early May, economic activities have begun to recover from the trough in the second quarter.

“The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook, ” it said.

Most economists had expected a cut in the OPR by 25 basis points to 1.75% at the meeting.

With the 25bp reduction in the OPR on Tuesday, Bank Negara has cut it by 125 basis points over the past four meetings. At 1.75%, this was the lowest in Bloomberg's records dating back to 2004.

According to 14 of the 25 economists surveyed by Bloomberg, they had expected a 25bp cut. Four had predicted a 50 basis-point reduction and the rest see no change.

For the full year 2020, the World Bank forecasts the Malaysian economy to decline by 3.1% after expecting its GDP to contract by about 10% in 2Q.

The International Monetary Fund (IMF), on the other hand, also downgraded its 2020 GDP growth forecast for Malaysia to negative 3.8%.

In the statement, Bank Negara said the impact of Covid-19 on the global economy wass severe. Global economic conditions remain weak with global growth projected to be negative for the year.

Below is the statement issued by Bank Negara: At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 1.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.00 percent and 1.50 percent, respectively.

The impact of COVID-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year.

Although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward. Several major economies have begun relaxing measures to contain the COVID-19 pandemic, leading to the gradual resumption of economic activity. Financial conditions have improved, although risk aversion remains elevated.

Downside risks to the global outlook remain, especially if a resurgence of the pandemic necessitates the reintroduction of containment measures.

For Malaysia, economic activity contracted sharply in the second quarter of the year, due to measures introduced to contain the pandemic globally and domestically.

Following the gradual and progressive re-opening of the economy since early May, economic activities have begun to recover from the trough in the second quarter.

The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook.

The projected improvement in the domestic economy is expected to be further supported by a gradual recovery in global growth conditions.

The pace and strength of the recovery, however, remain subject to downside risks emanating from both domestic and external factors.

These include the prospect of further outbreaks of the pandemic leading to re-impositions of containment measures, more persistent weakness in labour market conditions, and a weaker-than-expected recovery in global growth.

Inflationary pressures are expected to be muted in 2020. Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices.

The risks of a broad-based and persistent decline in prices are assessed to be limited as economic activity resumes and demand conditions improve.

Nevertheless, the outlook remains significantly affected by global oil and commodity prices. Underlying inflation is expected to be subdued and within expectations.

The reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery.

The MPC will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth.

The Bank will continue to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

Source: The Star

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