Tuesday, May 5, 2020

Malaysia cuts rate 3rd time in 2020, growth challenging

    Malaysia's central bank lowered its policy rate for the third time this year, as expected, saying economic conditions will be challenging in the first half of this year from domestic and international measures to contain the COVID-19 pandemic but growth prospects should improve in 2021 due to fiscal and monetary stimulus and the expected containment of the pandemic.
    Bank Negara Malaysia (BNM) cut its overnight policy rate (OPR) by 50 basis points to 2.0 percent  - its biggest rate cut since February 2009 - and has now cut it by 100 points this year following cuts in March and January.
    "Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity," BNM said, adding it will use its policy levers as appropriate to create the conditions for a sustainable economic recovery.
     BNM also said the financial sector was sound and liquidity ample, and it stands ready to provide liquidity to the interbank market to ensure orderly conditions.
      The central bank has provided some 42 billion renminbi to domestic financial markets via outright purchases of government securities, reverse repos and a reduction in the Statutory Reserve Requirement (SRR).
     In a separate statement, BNM said Malaysian Government Securities (MGS) and Malaysian Government Issues (MGII) can now be used by banks to fully meet the SRR requirement until May 31, 2021, releasing some 16 billion of liquidity into the banking system.
     In March, when BNM cut SRR by 100 basis points to 2.0 percent, it said each dealer was able to use MGS and MGII of up to 1 billion renminbi as part of their SRR compliance.
     While domestic measures to contain the spread of the virus have been necessary, they have also constrained production and spending, and expected to considerably weaken labour market conditions.
     As more businesses are allowed to operated under the government's conditional movement order, economic activity is projected to gradually improve but remains subject to high uncertainty with respect to developments around the pandemic.
     Many Malaysian businesses have been allowed to reopen this week after a 6-week shutdown, with the finance minister saying this weekend the economy could shrink more than initially forecast from the shutdown.
      On April 3 BNM estimated by country's exports could fall by 8.7 percent this year and has estimated the economy could shrink by as much as 2 percent to 0.5 percent growth in 2020 after growing 4.3 percent in 2019.
     Inflationary pressures are expected to be muted this year, with average inflation likely negative due to substantially lower oil prices and commodity prices while underlying inflation is expected to be subdued due to weaker domestic growth and labor market conditions.
     Malaysia's inflation rate fell to minus 0.2 percent in March from 1.3 percent in February.



    Bank Negara Malaysia issued the following two statements:


"At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 50 basis points to 2.00 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.25 percent and 1.75 percent, respectively.

Global economic conditions have weakened significantly. Measures to contain the COVID-19 pandemic have disrupted economic activity across most economies. Recent indicators show that the global economy is already contracting, with global growth projected to be negative for the year. Financial conditions have also tightened amid elevated risk aversion and uncertainty. Substantial policy stimuli introduced by many economies, coupled with the gradual easing of containment measures globally, would partially mitigate the economic impact of COVID-19. Growth prospects should improve in 2021 with the expected containment of the pandemic.        

For Malaysia, domestic economic conditions have similarly been affected by the pandemic. Widespread containment measures globally, international border closures and the consequent weak external demand environment will exert a larger drag on domestic economic activity. The Movement Control Order, while necessary to contain the spread of the virus, has also constrained production capacity and spending. Labour market conditions are also expected to weaken considerably. Economic conditions would be particularly challenging in the first half of the year. The fiscal stimulus measures, alongside monetary and financial measures will, however, offer some support to the economy. With more businesses allowed to operate under the Conditional Movement Control Order, economic activity is projected to gradually improve. The outlook for growth continues to be subject to a high degree of uncertainty, particularly with respect to developments surrounding the pandemic.

Inflationary pressures are expected to be muted in 2020, with average headline inflation likely to be negative this year, due mainly to projections for substantially lower global oil prices. Nevertheless, the outlook remains significantly affected by global oil and commodity prices, as well as evolving demand conditions. Underlying inflation is expected to be subdued given the projections of weaker domestic growth prospects and labour market conditions.

The financial sector is sound, with financial institutions operating with strong capital and liquidity buffers. Liquidity remains ample, augmented by liquidity injections by Bank Negara Malaysia. Since March 2020, Bank Negara Malaysia has provided additional liquidity of approximately RM42 billion into the domestic financial markets, via various tools including outright purchase of government securities, reverse repos and the reduction in Statutory Reserve Requirement. Bank Negara Malaysia stands ready to provide liquidity in the interbank market to ensure orderly market conditions, conducive to support financial intermediation activity.

With the decision today, the OPR has been reduced by a total of 100 basis points, complementing other monetary and financial measures by Bank Negara Malaysia as well as fiscal measures this year. Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity. The MPC will continue to monitor the outlook for domestic growth and inflation. The Bank will utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery."

Statement on Statutory Reserve Requirement (SRR)

"Bank Negara Malaysia is announcing today that MGS and MGII can be used by banking institutions to fully meet the SRR compliance effective 16 May 2020. This flexibility is available until 31 May 2021. This measure will release approximately RM16 billion worth of liquidity into the banking system. The Statutory Reserve Requirement (SRR) ratio remains unchanged at 2.00%.
 
This measure is part of Bank Negara Malaysia’s continuous efforts to ensure sufficient liquidity to support financial intermediation activity.
 
The SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy. The Overnight Policy Rate (OPR) is the sole indicator used to signal the stance of monetary policy, and is announced through the Monetary Policy Statement released after the Monetary Policy Committee meeting."

    www.CentralBankNews.info


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