Malaysia Holds Key Rate Amid Lockdown to Curb Virus Surge

(Bloomberg) -- Malaysia kept its benchmark interest rate unchanged Wednesday, saving its policy ammunition as the country grapples with a surge in Covid infections that could take months to subside.

Bank Negara Malaysia maintained the overnight policy rate at a record-low 1.75% at its first meeting of the year, as expected by 12 of 23 economists surveyed by Bloomberg. The rest had forecast a 25-basis point cut.

The decision comes as Malaysia has imposed fresh lockdowns across nearly the entire country and unveiled a new $3.7 billion aid package to help people weather the curbs. The restrictions, put in place after infections pushed the health system to the breaking point, were intended to last two weeks but may be extended, the government said.

Despite the new lockdown, the central bank “has opted to wait before deciding whether to deliver more support to the economy,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. The fresh stimulus “may have been enough for BNM to hold off for now and assess how the economy evolves.”

The ringgit, which earlier advanced 0.2% to 4.0430 per dollar, held its gains after the decision. The country’s benchmark stock index extended gains, rising 0.8%, with bank shares leading the advance.

Analysts have shaved as much as 1.5 percentage points from their 2021 gross domestic product forecasts because of the renewed curbs. While less severe than the two-month lockdown enacted last March, the restrictions will mean a loss of about 600 million ringgit ($148 million) per day, Bernama reported, citing Finance Minister Tengku Zafrul Abdul Aziz.

New Aid

The 15 billion ringgit aid package unveiled Monday aims to help households and businesses weather the restrictions. The announcement is mainly a “re-packaging” of budget measures and extension of last year’s economic stimulus measures, Maybank said in a note Tuesday, maintaining its growth forecast of 5.1% for this year.

“For 2021, while near-term growth will be affected by the re-introduction of stricter containment measures, the impact will be less severe than that experienced in 2020,” the central bank said. “The growth trajectory is projected to improve from the second quarter onward.”

The statement accompanying Wednesday’s decision “does sound a touch less neutral than before and opens up the potential for more support should sequential data disappoint,” said Edward Lee, chief economist for Asean and South Asia at Standard Chartered Plc in Singapore.

Among the key points from the decision:

• Banks’ ability to use government bonds toward statutory reserve requirements -- currently slated to end on May 31 -- was extended until the end of 2022
• Economic growth last year will come in toward the lower end of the central banks’ forecast for a 3.5% to 5.5% contraction
• Headline inflation this year will average higher due to oil prices
• Monetary policy going forward “will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth”

(Updates with more details throughout.)