Malaysia's OPR cut on the horizon amid economic uncertainty

[MALAYSIA] Malaysia may see at least one reduction in its benchmark overnight policy rate (OPR) in the coming months, as markets brace for growing uncertainty stemming from global trade tensions, key upcoming economic data, and subdued sentiment among businesses and consumers.

This possibility arises despite headline inflation remaining relatively low in April, registering 1.4% year-on-year (y-o-y)—the same as in March and slightly down from February’s 1.5% y-o-y rate.

Economists point to the dovish tone of Bank Negara Malaysia’s (BNM) monetary policy statement on May 8 as a signal that the central bank may be preparing to cut rates. Broader global economic dynamics are also influencing the bank’s policy outlook. Ongoing trade tensions between the United States and China continue to disrupt global supply chains and weigh on Malaysia’s export-driven economy, prompting businesses and consumers alike to adopt a more cautious stance.

United Overseas Bank (Malaysia) Bhd (UOB) noted that markets have already priced in at least one rate cut, though the exact timing will hinge on economic data, developments in trade negotiations, and overall sentiment.

The OPR has remained unchanged since May 2023, following a 25-basis-point increase by BNM. UOB highlighted several factors that could support a rate cut, including a benign inflation outlook, diminishing inflation risks from subsidy rationalisation in the second half of 2025, rising downside risks to growth, and a strengthening ringgit.

However, cutting rates is not without its risks. While inflation is currently under control, concerns persist over the potential impact of a global economic slowdown on Malaysia’s growth. The central bank faces the challenge of balancing efforts to support the economy without stoking inflation, particularly if global commodity prices rise sharply.

Despite speculation that a rate cut may come as early as July, UOB cautioned that the move is not guaranteed. The recent 100bps cut in the statutory reserve requirement (SRR) to 1%, effective May 16, was seen by many as a prelude to an OPR cut, but BNM may take a more measured approach.

The SRR serves to manage liquidity in the banking sector by mandating banks to hold a portion of their funds in reserve.

Significantly, BNM’s next Monetary Policy Committee meeting, scheduled for July 8–9, coincides with the conclusion of the United States’ 90-day pause on reciprocal tariffs. The outcome of this pause will be closely watched, as its expiration could reignite trade tensions and disrupt Malaysia’s export markets.

In early April, the U.S. imposed tariffs of 11% to 50% on certain trade partners but suspended them a week later. Malaysia responded with a reciprocal tariff of 24%. Nonetheless, all Malaysian exports to the U.S. remain subject to a baseline 10% tariff, even during the suspension.

Meanwhile, economists are keeping an eye on core inflation, which has shown signs of acceleration. According to Maybank Investment Bank Research, core inflation in April rose at the fastest pace in 17 months, driven by higher prices for services and durable goods.

The research firm maintained its 2% inflation forecast for the year but warned of potential upward risks stemming from subsidy rationalisation, electricity tariff reviews, and increasing foreign labour costs. Additionally, Budget 2025’s proposed hike in the sales tax on luxury items and expansion of the service tax scope—originally slated for May 1—remains delayed.

CIMB Research, on the other hand, projected a 25bps rate cut in July, citing weakening economic momentum. It pointed to slowing private consumption and exports in the first quarter ending March 31, as well as broader signs of a slowdown in GDP growth.

“The manufacturing Purchasing Managers’ Index (PMI) weakened further in April, remaining in contractionary territory and indicating ongoing weakness in the sector,” CIMB noted. While export figures have shown strength recently, the bank attributed this to short-term frontloading ahead of the tariff pause’s expiration.

Despite temporary gains, underlying economic indicators suggest continued fragility. Manufacturing, a critical component of Malaysia’s economy, remains under stress. While there is cautious optimism surrounding ongoing trade talks and a potential deal with the U.S., uncertainties remain high. The central bank will need to navigate these complex dynamics carefully to ensure that any rate adjustment supports growth without fueling inflationary pressures.