MALAYSIA Central Bank Surprise Interest Rate Cut

Malaysia’s central bank, seeing more clouds over the global economy after Britain’s Brexit vote, surprised markets by cutting its key interest rate for the first time in seven years in a bid to keep the country on a “steady growth path”.

Bank Negara Malaysia (BNM) today cut the overnight policy rate (OPR), steady since July 2014, by 25 basis points to 3%.

The Ringgit initially weakened slightly on the news, then turned firmer. For the year, the ringgit has been the region’s best-performing currency, strengthened 8.2% against the US dollar. It closed at 3.9690/9740 versus the greenback from 3.9785/9825 yesterday.

Most government bond prices rose with the 10-year yield down to 3.637%, the lowest since November 2013. Malaysian stocks rose fractionally after the cut.

In January, Malaysia revised its 2016 growth projection downwards to 4.0-4.5% from 4-5% on expectations of a sustained slump in global crude prices.

The last time the central bank cut the benchmark rate was February 2009, when it was slashed by 50 basis points to 2%.

Inflation is not a worry at present, and the central bank today cut its projection for 2016 to 2-3% from 2.5-3.5%. The annual pace was a seven-year high of 4.2% in February, but it slowed the next three months, reaching 2% in May.

BNM may consider further cuts later this year if global market conditions deteriorate, said Julia Goh, an economist for UOB Bank in Malaysia who, like many, expected a hold today.

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