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Investing.com -- Bank Negara Malaysia (BNM) kept its main policy rate steady at 3.0% today, but indicated a more pessimistic view on the economic outlook, suggesting the possibility of rate cuts later in the year. This decision was accurately anticipated by 24 out of 30 analysts who were surveyed.
The GDP growth in Malaysia significantly decelerated in the first quarter of the year. The ongoing trade war poses a potential threat to the future economic outlook. Despite a temporary relief provided by a 90-day pause on reciprocal tariffs by President Trump, the Malaysian economy could still face the impact of US tariffs on semiconductor exports following the conclusion of national security investigations.
The recent drop in commodity prices is also expected to negatively affect export earnings. From its statement, it is clear the trade war and Trump tariffs are a mounting concern for the central bank, which stated that “the escalation in trade tensions and heightened global policy uncertainties will weigh on the external sector”.
In the meantime, inflation has been substantially lower than anticipated, with the headline rate dropping to a mere 1.4% year-on-year in March, marking a four-year low. The future inflation outlook will largely be influenced by the government’s decision on whether to proceed with planned cuts to fuel and food price subsidies later this year.
Prime Minister Anwar Ibrahim is increasingly under pressure to scale back or abandon the cuts due to a weakening economy and upcoming key state elections. However, even if the cuts are implemented, the decline in global commodity prices, weaker GDP growth and the delay to the expansion of the sales and service tax suggest inflation is likely to be lower than previously expected.
Capital Economics shared their perspective, stating, "Overall, with growth likely to struggle and inflation concerns easing a little, there is plenty of room for the central bank to cut rates later this year. We think the policy rate will end the year at 2.50%. In contrast, the consensus expects no policy easing this year."
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