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Malaysia cuts key rate again as recession looms

Bank Negara Malaysia (BNM) cut its key overnight policy rate by 50 basis points to 2.00 percent on Tuesday, nearly a month after slashing it by 75 basis points.

Six out 13 polled economists expected the central bank to cut rates by 50 basis points, while seven expected no change.

The bank also cut its statutory reserve requirement by 100 basis points to 1 percent and said measures would be introduced to ensure continuous access to credit.

‘The domestic economic conditions are expected to continue to remain challenging in the coming quarters with the continued deterioration in the global economy,’ the central bank said in a statement.

Malaysia’s key rate is one of the lowest in the region, and the reduction is a sharp reminder of the stress the export-dependent economy is facing, especially after central bank Governor Zeti Akhtar Aziz said recently rate cuts were ‘front loaded’.

Malaysia’s economy, reeling under the impact of plunging exports, is expected to grow by just one percent in the fourth quarter, for which data will be released on Friday.

To deal with the economic headwinds, the government is set to announce another stimulus package next month after the first $2 billion package in November which has been criticised as being too slow in implementation.

‘Despite BNM chief’s comments that rate cuts are not constructive currently, the rate cut today shows that authorities recognize the dire state the economy is in,’ said Forecast economist Joanna Tan.

‘We expect that BNM will keep rate steady at 2.00 percent for the rest of the first half and now pass the baton over to the fiscal side with the stimulus package slated for announcement on March 10.’

Exports, a key driver of many Asian economies, are plunging across the region, including Malaysia where they fell 14.9 percent in December, due to crumbling global demand for electronics, autos and other consumer goods.

Small Asian countries like Singapore, Taiwan, South Korea and Malaysia rely on external demand to mop up their exports, which are worth 100 percent of Malaysia’s gross domestic product and 70 percent of Singapore’s.

With the financial crisis gripping the key markets of United States and Europe, and domestic demand also flagging due to rising unemployment, exports are not expected to recover anytime soon.

Malaysia’s government expects exports to fall as much as 4 percent this year, while several economists predict a double digit fall-a development that could lead Malaysia into its first recession in eight years.