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Malaysia cuts key rate as global central banks act to boost stimulus

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Bank Negara Malaysia reduced the overnight policy rate for a second time this year, lowering it by 25 basis points to 2.5 per cent.

Singapore

MALAYSIA cut its benchmark interest rate on Tuesday, with analysts predicting more easing to come as global central banks boost stimulus to counter the coronavirus's impact on economic growth.

Bank Negara Malaysia reduced the overnight policy rate for a second time this year, lowering it by 25 basis points to 2.5 per cent, as forecast by 15 of 24 economists surveyed by Bloomberg. Australia's central bank cut its rate by the same magnitude on Tuesday, a day after Indonesia relaxed banks' reserve requirements.

The rate cut "is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability", the central bank said in a statement.

Malaysia's effort to shore up the economy amid fresh threats to growth takes the key interest rate to its lowest level since July 2010. The policy easing follows last week's announcement of a 20 billion-ringgit (S$6.6 billion) fiscal stimulus package to counter the impact of the virus outbreak.

The world's top central banks have signalled a willingness to coordinate policy support as the coronavirus slams economies from Beijing to Rome to Washington.

The Federal Reserve, Bank of England, Bank of Japan and European Central Bank all have pledged to act in response to the rising risk to their economies. Group of Seven policy makers are set to discuss options later on Tuesday.

The central bank said first-quarter economic growth will be affected by the virus outbreak, especially the tourism and manufacturing industries. Growth is expected to "gradually improve" in the second half, although there are downside risks from the virus and weakness in commodity-related sectors, it said.

"There remains a dovish tinge to today's statement," said Wellian Wiranto, an economist at OCBC in Singapore.

"While it tries to play up the potential pickup in the second half and from virus mitigation policies globally, its focus on downside risks is inescapable."

Mr Wiranto, as well as other economists like Trinh Nguyen at Natixis Asia Ltd. and Mohd Afzanizam Abdul Rashid at Bank Islam Malaysia, said there was room for further rate cuts, although the timing will depend on the growth outlook.

The government last week revised its official economic forecast for 2020 to 3.2-4.2 per cent, from 4.8 per cent previously. It also widened the fiscal deficit target to 3.4 per cent of gross domestic product, from 3.2 per cent earlier.

"Given that we expect growth to slow to 3.6 per cent in 2020 from 4.3 per cent, the central bank will likely deliver one more cut, but likely dependent on how bad the fallout will be and remaining cautious also on the evolving political situation," Ms Nguyen said.

Malaysia is grappling with a political leadership battle that threatens to stall economic policy. Muhyiddin Yassin was appointed prime minister over the weekend, following a roller-coaster week in which the ruling coalition collapsed.

The ringgit dropped 0.1 per cent to 4.2080 per dollar after the rate decision and government bonds were little changed. The FTSE Bursa Malaysia KLCI Index rose 0.6 per cent, heading for its first gain in three days.

Tuesday's rate cut leaves Bank Negara with less policy space as the real interest rate moves closer to zero, although it still has more room than many regional peers. Malaysia's key rate adjusted for inflation is now 0.9 per cent, while five Asian economies have negative real rates. BLOOMBERG