Malaysia central bank holds rates citing significant economic improvement

MACROECONOMICS - KUALA LUMPUR. Malaysia's central bank kept interest rates unchanged at its last monetary policy meeting of the year as it pointed to a "significant improvement" in economic activity in the third quarter but said the outlook remained uncertain due to COVID-19.

Bank Negara Malaysia (BNM) kept its overnight policy rate at a record low of 1.75% as expected by a slim majority of economists in a Reuters poll, holding fire after 125 basis points of rate cuts so far this year.

Malaysia's economy plunged into its first contraction since the 2009 global financial crisis in the second quarter but has since shown signs of recovery with exports rising at their fastest pace in nearly two years in September.

While the central bank expected further improvement in economic activity in 2021, it said targeted measures to contain the pandemic after a resurgence in cases in Malaysia over the past two months could affect the pace of the recovery in the fourth quarter.

"Growth for the year 2020 is expected to be within the earlier forecasted range," BNM said referring to its August forecast for a 3.5% to 5.5% economic contraction this year.

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"Nevertheless, the pace of recovery will be uneven across sectors," it said, adding that "downside risks to the outlook remain, stemming mainly from ongoing uncertainties surrounding the pandemic globally and domestically."

Stocks in Kuala Lumpur were steady after the decision, as was the Malaysian ringgit, which traded around 4.1520 per dollar.

The rate decision comes just days before Prime Minister Muhyiddin Yassin's administration is due to present its first budget on Friday.

Facing a challenge from the opposition and dissent within his coalition, Muhyiddin has urged lawmakers to pass the 2021 budget to tackle the fallout of the pandemic.

The government has already rolled out 305 billion ringgit ($73.41 billion) in stimulus measures this year to cushion the fallout from the pandemic.

"A second wave of the virus is likely to have sent the recovery into reverse," said analysts at Capital Economics.

"With the economy suffering from a second major outbreak of the virus, we doubt this marks the end of the central bank’s easing cycle."

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