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KUALA LUMPUR: The Negara Malaysia Bank Monetary Policy Committee (MPC) cut interest rates by 50 basis points to 2%, which is the lowest level since 2010 as internal economic conditions have been affected by the pandemic from Covid-19.
Tuesday’s announcement to lower the overnight policy rate (OPR) was within market expectations as the economy contracted due to the Covid-19 pandemic that had hit countries around the world.
With the latest decision, the OPR has been reduced by a total of 100 basis points, complementing other Negara Bank monetary and financial measures, as well as fiscal measures this year.
After the reduction in the OPR on Tuesday, the maximum and minimum rates of the OPR corridor are correspondingly reduced to 2.25% and 1.75% respectively.
In its statement, Bank Negara said that global economic conditions have weakened significantly. Measures to contain the Covid-19 pandemic have disrupted economic activity in most economies.
He said recent indicators show that the global economy is already contracting, and global growth is projected to be negative for the year. Financial conditions have also tightened amid high risk aversion and uncertainty.
He also noted that the substantial policy stimuli introduced by many economies, along with the gradual reduction of containment measures worldwide, would partially mitigate the economic impact of COVID-19.
However, growth prospects are expected to improve in 2021 with the expected containment of the pandemic.
“For Malaysia, internal economic conditions have also been affected by the pandemic. Widespread containment measures worldwide, closings of international borders and the consequent weak external demand environment will put a further drag on domestic economic activity.
“The Movement Control Order, while necessary to contain the spread of the virus, has also limited production capacity and spending.
“Labor market conditions are also expected to weaken considerably. Economic conditions would be particularly difficult in the first half of the year.
“However, fiscal stimulus measures, along with monetary and financial measures, will offer some support to the economy,” Banco Negara said.
He said that as more companies can operate under the Conditional Movement Control Order, he expects economic activity to gradually improve.
However, he was cautious about the outlook as growth continues to be subject to a high degree of uncertainty, particularly with regard to the events surrounding the pandemic.
On inflation, he said inflationary pressures were expected to ease in 2020, with average headline inflation likely to be negative this year, mainly due to substantially lower world oil price projections.
“However, prospects are still significantly affected by world oil and commodity prices, as well as changing demand conditions. Core inflation is expected to be moderate due to weaker projections for domestic growth prospects and labor market conditions, ”he said.
Bank Negara also said the financial sector was strong, with financial institutions operating with strong capital reserves and liquidity. Liquidity remains broad, augmented by liquid injections from Banco Negara.
“Since March 2020, Bank Negara has provided additional liquidity of approximately RM42bil in the national financial markets, through various tools including the direct purchase of government securities, reversed repos and the reduction of the legal reserve requirement. Bank Negara is ready to provide liquidity in the interbank market to guarantee orderly market conditions, conducive to supporting financial intermediation activity.
Together, these measures will cushion the economic impact on businesses and households and support the improvement of economic activity. The MPC will continue to monitor the prospects for internal growth and inflation. The Bank will use its policy levers as appropriate to create conditions conducive to a sustainable economic recovery, ”he said.
The Bloomberg survey said it hoped that the OPR rate cut by 50 basis points out of the ordinary was to help dampen the economy just as the government begins to relax restrictions put in place to contain the coronavirus pandemic, Bloomberg reported. This was the lowest level since 2010, at 2.5%, according to 14 of the 20 economists surveyed by Bloomberg.
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