Malaysia’s central bank elected Tuesday to maintain its current Overnight Policy Rate (OPR), amid an increasingly dovish tone across the Asia-Pacific region, as global economic headwinds continue to dampen growth prospects.

The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to leave its OPR unchanged after having cut it by 25 basis points to 3.0% at its previous meeting in early May.

The central bank reiterated that leading indicators “point to a softening of the near term global economic outlook, with considerable downside risks remaining primarily from prolonged trade tensions.

“While the prospects of monetary easing in the major economies have somewhat eased global financial conditions, heightened policy uncertainty could lead to excessive financial market volatility.”  

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Malaysia’s MPC had echoed the concerns of other APAC-based central banks, including the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), when citing considerable downside risks to global growth, “stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies.”

With exports of goods and services comprising roughly 72% of Malaysia’s GDP, slower growth in top trading partners such Singapore, China, and Japan has spurred its central bank to provide added stimulus to the country’s economy.

Indeed, Bank Negara Malaysia had noted that “slowing global demand conditions and subdued growth of key trading partners will continue to weigh” on Malaysia’s external sector.

Others agree that Malaysia’s economy remains vulnerable to the crossfire of trade-related headwinds.

In a speech in late June to the University of Malaya – Kuala Lumpur, International Monetary Fund managing director Christine Lagarde had pointed out that global trade growth “has been subdued for more than six years,” and with the largest economies in the world putting up new trade barriers, there will be a “direct impact on an integrated and open economy like Malaysia’s.”

Lagarde continued that raising productivity is “essential if Malaysia is to reach its goal of high-income status in the next decade. Despite the economic success of the last twenty years, productivity has not grown as much as hoped, and in recent years it has stagnated,” which poses a threat to average income growth and living standards.

Downside Risks Persist

Meanwhile, Bank Negara Malaysia expects the country’s economy to grow within a range of 4.3% – 4.8%. However, it noted, “downside risks from ongoing uncertainties in the global and domestic environment, worsening trade tensions and extended weakness in commodity-related sectors.” – namely oil.

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The Malaysian central bank also said that while headline inflation has “remained low,” it is expected to rise in the coming months as the impact of the changes in consumption tax policy lapses.

The MPC added that for the full year 2019, average headline inflation is expected to be “broadly stable” compared to 2018, with its trajectory continuing to rely on global oil prices and policy measures such as the timing of the lifting of the price ceiling on domestic retail fuel prices.

The cost of crude has fallen a little more than 22.7% from its latest 52-week high set in early October 2018 but had risen somewhat in early-mid May, while Malaysia’s Consumer Price Index (CPI) inched up 0.2% year-on-year in that same month to 121.4.

According to Malaysia’s Department of Statistics, the main groups that contributed to the increases were housing, water, electricity, gas and other fuels (+1.8 percent).

Doves’ Wings Spread Wider

Against this backdrop, the dovish stance at Malaysia’s central bank joins the RBA, the RBNZ, the European Central Bank (ECB), as well as the U.S. Federal Reserve and a host of others, in buoying their respective economies and spurring risk-taking further.

Russ Koesterich, a portfolio manager for BlackRock, recently noted that in contrast to 2018, “central banks are no longer talking about ‘normalizing policy.’ Instead, there is a renewed focus on providing downside protection for the global economy.”

He added that in this type of environment, “it is often the riskiest assets that gain the most.”

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Malaysian equities, as evidenced by the iShares MSCI Malaysia ETF (NYSEARCA: EWM), which includes among its top holdings financials sector firms Public Bank Bhd (KLSE: PBBANK), Malayan Banking Bhd (OTCMKTS: MLYBY) and CIMB Group Holdings Bhd (KLSE: CIMB), have retraced more than half of their losses from August 2018-May 2019, amid the country’s central bank accommodation.

The ETF has risen by more than 8.6% from its most recent 52-week low set on May 13 after a 13.6% plunge from early August 2018.

However, the yield on 10-year Malaysian government notes also fell around 28.5 bps since mid-April to a new 52-week low of about 3.61% on July 4.

Koesterich added that “buying emerging markets at a time of decelerating global growth and lingering trade frictions seems ill-timed. To be sure, both the economy and trade represent real threats to the asset class, as well as the broader market. 

“That said, for those investors who believe that trade will simmer, not erupt, and that the global economy will continue to grow, there is one powerful argument supporting EM equities: the prospect for materially easier financial conditions.”

Malaysia’s Economic Calendar

Investors will receive a small handful of economic updates in the week ahead, which should provide additional insights into how Malaysia’s economic growth has been faring considering the escalating downside risks.

Following the Bank Negara Malaysia’s rate decision Tuesday, other release highlights that are due out ahead of the weekend include:

Friday, July 12

• Industrial Production (May)
• Unemployment Rate (May)

Malaysia’s industrial production index (IPI) grew by 4.0% in April 2019, driven by an across-the-board increase in electricity (5.8%), manufacturing (4.3%) and mining (2.3%).

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The country’s unemployment rate in April 2019 remained at 3.4% for the second straight month, while the number of unemployed rose 0.4% from the prior month 523.3k persons.

Investors will likely be watching for any signs of further deterioration in Malaysia’s external sector as trade tensions drag on, as well as indications of heightened productivity, income, and increased domestic demand to support overall growth.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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