Malaysia faces likely OPR cut in 2025

[MALAYSIA] Investment banks are forecasting a 25 basis point reduction in Malaysia's Overnight Policy Rate (OPR) by Bank Negara Malaysia (BNM) in the second half of 2025. This anticipated cut reflects growing concerns over economic slowdown, declining exports, and global trade uncertainties, which have prompted analysts to adjust their outlooks for the nation's monetary policy.

Economic Indicators Prompt Rate Cut Expectations

Malaysia's economic growth has shown signs of deceleration. The first quarter of 2025 saw a 4.4% year-on-year GDP growth, a decrease from the previous quarter's 5.9%. Concurrently, inflation has remained subdued, with the March Consumer Price Index (CPI) at 1.4%, the lowest in four years. These factors have led economists to revise their forecasts, with the International Monetary Fund (IMF) projecting a 4.1% GDP growth for Malaysia in 2025, below the government's target range of 4.5% to 5.5%.

In response to these economic challenges, BNM has already implemented measures to inject liquidity into the banking system. On May 8, 2025, the central bank announced a 100 basis point cut to the statutory reserve requirement (SRR), reducing it to 1.00%, thereby releasing approximately RM19 billion into the financial system.

The manufacturing sector, traditionally a key driver of Malaysia’s economy, has reported a sharp contraction in export orders, particularly in electronics and palm oil — two of the nation’s largest export categories. According to data from the Department of Statistics Malaysia, total exports in April 2025 fell by 8.7% year-on-year, marking the fourth consecutive monthly decline. The slowdown in China, one of Malaysia’s largest trading partners, is cited as a contributing factor to the declining trade figures.

Meanwhile, household consumption — which comprises over half of Malaysia’s GDP — has been increasingly constrained by high household debt levels and wage growth that has not kept pace with the cost of living. A recent consumer sentiment index compiled by the Malaysian Institute of Economic Research (MIER) dropped to its lowest point since 2021, suggesting consumers are tightening spending in anticipation of tougher economic times ahead. A rate cut could help lower borrowing costs and ease financial pressures on households.

Investment Banks Align on Rate Cut Forecast

Several investment banks have aligned in their expectations for a rate cut later this year. Maybank Investment Bank (Maybank IB) anticipates a 25 basis point reduction in the OPR by the end of 2025, citing the need to support domestic demand amid external headwinds. Similarly, AmBank Research forecasts a 25 basis point cut, projecting the OPR to decrease to 2.75% in the second half of 2025. They note that such a move would be consistent with BNM's cautious approach to monetary policy.

Goldman Sachs and CIMB Bank have also expressed expectations for a 25 basis point easing later this year, aligning with the broader consensus among financial analysts.

In addition to domestic considerations, global monetary trends are also influencing expectations. The U.S. Federal Reserve is widely anticipated to begin rate cuts in the latter half of 2025, following signs of easing inflationary pressures in the U.S. A dovish turn by the Fed could provide BNM with greater flexibility to ease its own monetary stance without exerting undue pressure on the ringgit, which has already shown some resilience against the U.S. dollar in recent weeks.

Potential Implications of an OPR Cut

A reduction in the OPR could have several implications for Malaysia's economy:

Bank Profitability: A lower OPR may compress net interest margins (NIMs) for banks, potentially affecting their profitability. However, analysts suggest that asset quality and credit costs are expected to remain stable.

Investment Climate: A rate cut could make borrowing more attractive, potentially stimulating investment and consumption.

Currency Impact: The Malaysian ringgit has experienced volatility due to global trade tensions. A rate cut might influence investor perceptions of the currency, depending on broader economic factors.

As Malaysia navigates a period of economic uncertainty characterized by slowing growth and external trade challenges, the anticipated 25 basis point OPR cut in the second half of 2025 reflects a strategic move by Bank Negara Malaysia to support the economy. While the exact timing remains to be seen, the alignment among investment banks suggests a consensus on the need for accommodative monetary policy to bolster economic resilience.