Global Rate Cuts Signal Policy Shifts, But Malaysia Takes A Measured Approach

KUALA LUMPUR, 11 Oct (Bernama) -- The rate cuts in several countries worldwide reflect a global shift in monetary policy towards easing, driven by differing domestic economic conditions, said an analyst. 

Mohd Sedek Jantan, the head of investment research at UOB Kay Hian Wealth Advisors, highlighted Malaysia's approach may differ as Bank Negara Malaysia (BNM) is likely to focus on domestic fundamentals rather than merely following global trends. 

"While other central banks are reducing rates, BNM is expected to take a more measured approach. We anticipate BNM will maintain its key interest rate at 3.0 per cent throughout 2025," he told Bernama. 

This expectation is supported by Malaysia’s headline inflation, with the consumer price index (CPI) moderating to 1.9 per cent in August 2024, alongside robust gross domestic product (GDP) growth. 

He noted that while inflation is well-contained, Malaysia’s broader economic strategy must account for external factors like currency volatility and potential global demand shifts.

Adjustments to BNM’s monetary policy will likely involve interest rates and wider macroeconomic measures to ensure price stability, support investor confidence, and safeguard long-term economic resilience, Mohd Sedek added. 

Global Rate Cuts

In India, Mohd Sedek said the Reserve Bank of India (RBI) moved from a previously hawkish “withdrawal of accommodation” to a more neutral stance, which signalled a measured yet strategic adjustment. 

In contrast, the Reserve Bank of New Zealand (RBNZ) took a more assertive approach which saw the central bank cut interest rates by 50 basis points (bps) in response to sluggish growth, despite persistent inflation pressures.

"This proactive stance prioritises economic growth over inflation concerns, a potential lesson for Malaysia, where economic resilience remains a key focus," he said. 

 Mohd Sedek said another example is the Bank of Korea (BOK), which cut its benchmark interest rate by a quarter percentage point to 3.25 per cent at its monetary policy review, its first policy interest rate cut in four and a half years. 

"While inflation has steadily declined, the rapid growth in household debt remains a key risk, possibly delaying more decisive rate cuts. Malaysia may draw some parallels here, facing its own blend of inflation control and fiscal challenges," he said. 

Maintaining vs Implementing Current Interest Rate Cuts

Mohd Sedek emphasised that maintaining the current interest rate has numerous advantages, including effective control over inflation and the protection of consumers' purchasing power.

He said a stable interest rate environment could deter excessive borrowing and consumption, which helps mitigate inflationary pressures that could erode real income levels. 

Conversely, implementing a rate cut could provide immediate relief by lowering borrowing costs and potentially stimulating economic activity.

Such a move, however, carries substantial risks; particularly the possibility of escalating household debt, he said. 

"While short-term relief may be appealing, lower rates can inadvertently encourage over-leveraging, leading to higher default rates if economic conditions deteriorate or inflation rises. 

"Given that Malaysia's household debt remains healthy, introducing additional risks may be unnecessary," he said.

Therefore, in light of current economic conditions, maintaining the interest rate is beneficial for Malaysia, he concluded.

BNM's Upcoming Monetary Policy Committee (MPC) Meeting

Mohd Sedek urged BNM to closely monitor a variety of indicators leading up to the last MPC meeting of the year, scheduled on Nov 5-6.  

While domestic economic data, including labour market statistics, inflation rates, and production figures, are crucial for evaluating the health of the Malaysian economy, it is essential not to overlook the significance of external factors. 

This includes the forthcoming US presidential election, coupled with the Federal Reserve's (Fed) decisions and ongoing geopolitical risks.

"Changes in US monetary policy have a significant impact on global capital flows, foreign exchange rates, and overall investor sentiment. When the Fed adopts an accommodative stance, such as cutting interest rates, it generally leads to lower yields in the US. 

"This situation prompts investors to seek higher returns elsewhere, making emerging markets like Malaysia more attractive to capital inflows. As a result, Malaysia may witness an increase in foreign investment, which can lead to an appreciation of the ringgit," he said. 

The ringgit appreciation could help ease inflationary pressures, as a stronger currency typically reduces the cost of imported goods, benefiting consumers and enhancing overall economic sentiment.

-- BERNAMA