Bank Negara Holds Rates On Economic Rebound Flags Uneven Recovery

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Bank Negara Malaysia (BNM) kept interest rates steady today, holding fire after delivering monetary stimulus for four consecutive meetings, as the coronavirus-hit economy showed some signs of recovery
Bank Negara left its overnight policy rate at 1.75 percent. Six out of 13 economists polled by Reuters had expected rates to remain unchanged, with a slim majority betting on a rate cut
The central bank said economic activity, supported by fiscal and monetary stimulus, had improved since a trough in April
While it expected the recovery to continue into 2021, partly thanks to higher external demand, it said the rebound would be uneven across sectors and flagged "downside risks" and "uncertainties" linked to the coronavirus outbreak
"Given the outlook for growth and inflation, the MPC (monetary policy committee) considers the stance of monetary policy to be appropriate and accommodative," BNM said in a statement
"The Bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery."Malaysia's benchmark KLSE and ringgit currency were little changed after the central bank's announcement
The export-reliant economy saw its worst slump ever in the second quarter due to the fallout from the coronavirus pandemic
While it has shown some signs of recovery, with a rebound in exports at the start of the third quarter, domestic consumption has remained subdued, consumer prices fell for a fifth straight month in July while unemployment stayed stubbornly high at 5.1 percent in the second quarter
"The pace of recovery will be uneven across sectors, with economic activity in some industries remaining below pre-pandemic levels, and a slower improvement in the labour market," the BNM said
The decision to hold fire comes after the central bank has already delivered 125 bps of rate cuts this year, while the government has rolled out stimulus packages worth nearly RM270 billion
But Alex Holmes, Asia economist at Capital Economics, said the damage to household and corporate budgets from the downturn indicates the need for further support, especially with the government likely to tighten fiscal policy next year to stabilise public finances
"All said, there is a strong case for more easing," Holmes said
"We expect one more 25bp rate cut at the Bank's last meeting of the year in November, followed by a further 50bps of easing in 2021."- Reuters

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