Malaysia sees room to cut interest rates

Bloomberg

Malaysia’s central bank sees room to adjust monetary policy again after economic growth slowed to its weakest pace in more than a decade and the nation braces for the impact of the coronavirus on tourism and trade.
Fourth quarter gross domestic product expanded 3.6% from a year ago, the lowest since the third quarter of 2009 and far worse than the 4.1% median estimate in a Bloomberg survey. That brought the full-year growth figure for 2019 to 4.3%, the weakest since the global financial crisis a decade ago, and below the government’s initial projection of 4.7%.
Malaysia’s central bank surprised economists last month by lowering interest rates by 25 basis points, taking early action to bolster growth as global risks began escalating. Thailand, the Philippines, Sri Lanka soon followed with rate cuts, and economists are betting several more in the region will ease policy this year as the effect of the coronavirus becomes more severe.
“We have ample room” to adjust interest rates, Bank Negara Malaysia Governor Nor Shamsiah Mohd Yunus told reporters in Kuala Lumpur at the release of the GDP report. “Our inflation is still low, so we do have that policy space.”
The benchmark FTSE Bursa Malaysia KLCI Index extended its decline to 0.4% after the data, trading within 2% of what would mark its entry to a bear market. The ringgit weakened 0.1% to 4.1357 a dollar as of midday break in Kuala Lumpur.
“Growth momentum has clearly faltered and all else equal, this validates the BNM’s recent cut and sets the stage to consider further easing,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore.
Palm oil production, which makes up 39% of farm output, fell almost 17% from a year ago. Natural gas production contracted 2.1%. Crude oil fell 5%.
The governor said growth could have been as strong as 4.3% if there were no disruptions to supply.
Tourism and manufacturing in the first quarter will likely be affected by the spread of the coronavirus, though other sectors may help offset the damage, the governor said. The central bank will provide a full-year growth forecast in March.
“One sector may be affected much more but because of the diversified nature of the economy, other sectors will be able to cushion the impact of the coronavirus on selected sectors of the economy,” she said.
Charu Chanana, deputy head of Asia research at Continuum Economics in Singapore, said while she had expected January’s rate cut to be the last in this cycle, there’s an increasing chance of another move this year. The government will also need to step up budget support, she said.
“We believe a challenging external environment continues to pose threats, and further disruptions in supply chain or commodity-related sectors can be expected,” she said. “We think the policy makers need to fire on all cylinders. A stimulus package to address the coronavirus concerns is already in the works, and we believe more fiscal measures may be on the way as well.”