Bank Negara Malaysia Rate Cut: Economists Divided on Next Steps

Bank Negara Malaysia’s (BNM) recent decision to lower its Overnight Policy Rate (OPR) by 25 basis points to 2.75% has sparked a lively debate among economists, investors, and businesses. While the cut is seen as a pre-emptive move to support economic momentum in the face of growing global uncertainty, experts are divided on whether this marks the start of a broader rate cut cycle or a cautious, one-off adjustment.

This development carries significant implications for Malaysia’s growth prospects, trade outlook, and monetary policy strategy in a challenging global environment.

A Pre-Emptive Move to Safeguard Growth

BNM’s rate cut comes amid signs of moderating domestic growth and growing risks from external factors, including trade tensions and weaker global demand.

Analysts generally agree that the move is designed to offer pre-emptive support for the economy as it faces headwinds in the second half of the year. By lowering borrowing costs, BNM aims to stimulate consumption and investment while maintaining Malaysia’s competitiveness amid rising global uncertainty.

MIDF Research described the cut as a forward-looking move, noting that the second half of the year is likely to see slower growth, partly due to potential trade disruptions and a softening semiconductor sector. However, the firm emphasized that while rate adjustments can help, targeted support for vulnerable industries may be a more effective strategy to sustain growth.

Historical Context and Policy Flexibility

BNM’s approach to rate adjustments has historically been measured, with back-to-back cuts reserved for times of major economic shocks, such as the Global Financial Crisis or the Covid-19 pandemic.

Australia and New Zealand Banking Group (ANZ Research) noted that, barring those exceptional periods, BNM typically moves cautiously, waiting for clear signs of sustained economic weakness before committing to a cycle of cuts. This historical perspective suggests that while the recent move is significant, it may not necessarily signal a prolonged easing trend.

Nonetheless, several economists argue that BNM’s recent policy statement suggests flexibility and a readiness to act further if downside risks intensify. The central bank’s Monetary Policy Committee (MPC) has maintained a cautious tone, recognizing both the opportunities and risks in the current economic landscape.

Divergent Views on the Path Ahead

While many analysts see the latest rate cut as a one-off move, some believe that further reductions are possible depending on how economic conditions evolve.

UOB Global Economics & Markets Research sees the cut as part of a shift in policy tone aimed at preserving steady growth amid moderate inflation prospects. UOB analysts suggest there is room for another 25 basis point cut if downside risks worsen, projecting an OPR of 2.50% by year-end if conditions deteriorate.

Similarly, OCBC Global Markets Research sees the recent move as indicative of a “dovish pivot,” arguing that BNM’s acknowledgement of downside risks and contained inflation implies further easing is on the table. OCBC anticipates another 25 basis point reduction in the coming policy meetings, depending on how economic data unfolds.

In contrast, CIMB Treasury and Markets Research takes a more cautious stance. While acknowledging the potential for further action, it emphasizes that the domestic economy continues to exhibit solid fundamentals, including a declining unemployment rate and manageable inflation. This, CIMB argues, suggests there may be less urgency for multiple rate cuts unless growth slows sharply.

Balancing Inflation and Growth Concerns

A key factor underpinning BNM’s flexibility is Malaysia’s relatively benign inflation environment. Headline inflation remains contained at around 2.2%, providing the central bank with space to prioritize growth without risking price stability.

Moreover, the Malaysian ringgit has appreciated notably against the US dollar, helping to reduce imported cost pressures and supporting purchasing power. These dynamics have allowed BNM to adopt a more accommodative stance without the inflationary trade-offs seen in some other emerging markets.

CIMB Research highlighted these favourable conditions, noting that the recent appreciation of the ringgit and subdued inflation create policy space that BNM can use if growth risks intensify.

Trade Risks and External Headwinds

The backdrop to BNM’s decision is a challenging global trade environment, marked by geopolitical tensions and policy uncertainty. Economists have flagged particular concerns about the potential impact of newly announced tariffs on Malaysian exports, which threaten to dampen the country’s trade-dependent growth outlook.

With the possibility of significant tariffs looming, Malaysia is engaged in negotiations to mitigate the impact on its critical export sectors. If these negotiations fail to secure exemptions or delays, economists warn that the drag on export growth could spill over into household income and domestic demand—justifying further policy support.

OCBC projects that Malaysia’s economic growth momentum could slow sharply in the second half of the year if tariffs are implemented at the expected rate with no relief measures. This scenario would not only weaken exports but also dampen consumer spending and business investment.

Monetary Policy Tools Beyond OPR

In addition to adjusting the OPR, BNM has other tools at its disposal. Earlier this year, it surprised markets by lowering the statutory reserve requirement (SRR) by 100 basis points to 1%, injecting significant liquidity into the banking system.

This move underscores BNM’s readiness to use multiple levers to support financial conditions and ensure credit flows remain healthy. While the SRR was left unchanged in the most recent meeting, its low level provides ongoing stimulus to the economy.

Looking Ahead: Data-Driven Decisions

Ultimately, the path of Malaysia’s monetary policy will depend on how key economic indicators evolve in the coming months. With upcoming MPC meetings scheduled for the near future, policymakers will closely monitor growth, trade dynamics, employment trends, and inflation data.

Economists generally agree that while the rate cut provides timely support, Malaysia’s strong economic fundamentals and contained inflation give BNM the flexibility to respond as needed. Whether this marks the start of a broader easing cycle will depend on how effectively the economy weathers external shocks and maintains domestic demand.