Weaker exports, easing inflation and global shifts could push BNM towards policy easing

by IFAST RESEARCH TEAM

MALAYSIA’S economy ended 2024 on a strong note, supported by strong investments and domestic spending due to political stability and clear economic direction through the Madani economic framework, contributed to a 5.1% year-on-year (YoY) GDP growth in 2024.

While domestic fundamentals remain robust, ongoing global trade policy uncertainties have placed Malaysia in a relatively disadvantaged position due to its high dependence on external trade, with the export-to-GDP ratio reaching approximately 70% in 2024. If these external headwinds persist, we believe they will continue to pose downside risks to the broader economy, particularly as trade frictions and geopolitical tensions weigh on export performance.

Looking ahead, should downside risks further weaken the economy due to external headwinds, we believe Bank Negara Malaysia (BNM) has more rooms to implement interest rate reduction, with the underlying reasons will be discussed throughout this article.

Why we believe there are more rooms for BNM to implement rate cut?

Global trade tension has slowed the economy growth in 1Q25 GDP.

Malaysia’s economy expanded by 4.4% YoY in the first quarter of 2025 (1Q25), below the growth target of 4.5% to 5.5% and signalling a slowdown amid global trade uncertainties. The deceleration was primarily driven by softer growth across key production sectors, including services (5% versus 5.5% in 4Q24), manufacturing (4.1% versus 4.2%) and construction (14.2% versus 20.7%). Mining and quarrying continued to contract (-2.7% versus. -0.7%), while agriculture posted a modest rebound (0.6% versus -0.7%).

On the expenditure side, private consumption (5% versus 5.3%) and fixed investments (15.3% versus 11.5%) eased, while government spending (4.3% versus 4%) saw stronger growth. Net external trade weighed on GDP, as both export and import growth slowed to 3.1% (down from 5.9%) and 4.1% (down from 8.7%) respectively.

With economic growth showing signs of slowing, coupled with equity capital outflows and potential credit weakness in export-oriented sectors, BNM surprised markets with a 100 basis points cut to the Statutory Reserve Requirement (SRR), lowering it to 1%, to inject RM19 billion into the banking system. While BNM maintains that the SRR adjustment is not indicative of a shift in its monetary policy stance, such liquidity measures have historically preceded cuts to the Overnight Policy Rate (OPR). For instance, during the previous easing cycle, BNM lowered the SRR by 50 basis points (bps) in November 2019, followed by a 25bps cut to the OPR in January 2020.

In addition, in the May Monetary Policy Committee (MPC) statement, BNM removed affirming words previously used to describe the economy, including “strong”, “resilient” and “robust” and reflected in the revised language, signalling a shift from a neutral to a more dovish stance.

Soften inflation with delayed in targeted policy provide rooms for rate cut

Following five consecutive interest rate hikes between April 2022 and May 2023, Malaysia’s inflationary pressures have continued to ease. As of March 2025, headline inflation fell to 1.4% YoY, below the 10-year historical average of 1.9% and marking the eighth straight month of deceleration since reaching a peak of 2%.

Among the Consumer Price Index (CPI) baskets, only education and recreation, entertainment and cultural services posted a sequential uptick, rising by 2.2% YoY and 1.7% YoY, respectively. Key components such as food and non-alcoholic beverages and housing, utilities and fuels remained largely stable, reinforcing the narrative of broadly contained inflation across essential categories.

Taking out the most volatile items, including fresh food and administered prices such as cooking oils, fuels and electricity, the core inflation held steady at 1.9% YoY in March. Meanwhile, inflation excluding fuel moderated further to 1.5% YoY, down from 1.6% in February, indicating that underlying price pressures in core goods and services remain soft.

In addition, the Ministry of Finance (MOF) recent decision to delay the expansion of the Sales and Services Tax (SST), which was expected to take place on May 1, reinforcing the case for a more accommodative monetary policy stance. Moving forward, we do not rule out the possibility that the rationalisation of RON95 fuel subsidies may also be postponed as a measure to ease inflationary pressures.

Even if these policy adjustments will be implemented for the government fiscal reform, we believe that the current stable crude oil prices will help mitigate any significant upward pressure on overall prices. Should the economy weaken further due to softening external demand, we believe the prevailing low and manageable inflation environment provides BNM with sufficient policy space to proceed with rate cut.

China’s export redirection and rerouting through 3rd countries, including Malaysia, may exert disinflationary pressure, while MPC meeting statement differentiation also intensifying competition for local SMEs, prompting a greater need for supportive policies from govt and central bank

With the escalation of the US-China trade war, where reciprocal tariff rates have significantly reduced the viability of direct bilateral trade, China is expected to redirect its exports toward non-US markets or reroute them through third countries, including Malaysia. Notably, Malaysia currently faces one of the lowest reciprocal tariffs imposed by the US, positioning it as a potential transshipment or substitute destination for Chinese goods. This trend is reflected in the double-digit growth in imports from China, which rose 10.1% YoY (versus 6.9% in March 2024), accounting for 22.1% of Malaysia’s total import volume.

This diversion of Chinese exports could exert disinflationary pressure on Malaysia, particularly through dumping effects that may lower input costs. Meanwhile, it also poses a threat to domestic producers, especially in manufacturing subsectors such as steel and intermediate electronics, which may face intensified competition.

To help safeguard local industry and stimulate domestic demand, the government has introduced RM1.5 billion in additional loan guarantees and financing to support small and medium enterprises (SMEs) that have affected from the US tariff measures. We believe that to further enhance competitiveness and ease the financial burden on SMEs, BNM may have to cut the OPR to lower borrowing costs and stimulate lending demand amid rising external competition.

Stronger ringgit provides BNM with greater leeway to implement rate cut

In 2024, the ringgit closed out the year as a top performer among major Asian currencies, despite risk-off sentiment pulling back foreign fund flows amid a hawkish pause by the US Federal Reserve (Fed) in late 2024. The ringgit’s strength was not only evident against the greenback but also against other currencies such as the Singapore dollar, euro and Thai baht, driven by strong domestic economic growth, which helped anchor the ringgit within the 4.3-4.4 range.

Additionally, repatriation of overseas earnings by government-linked companies (GLCs) and government-linked investment companies (GLICs) helped ease downward pressure on the ringgit. This, coupled with healthy and resilient domestic fundamentals, has formed a solid support base for the currency. We believe these factors will continue to underpin the ringgit’s stability and resilience going forward.

Meanwhile, ever since Trump’s inauguration, his unpredictable policy stance and aggressive approach to global trade have undermined investor confidence in US assets. Although there have been signs of de-escalation in the trade war through negotiations with countries such as the UK and China, the Trump administration’s intention to maintain tariffs well above 2024 levels, combined with inconsistent tariff announcements, has raised further doubts about the credibility of the US economic outlook. As a result, the ringgit could strengthen against a weakening greenback.

In a nutshell, we believe Malaysia’s favourable economic prospects and ongoing structural reforms, alongside a relatively stable political backdrop and initiatives could continue to sustain the strength of ringgit, which could provide BNM with greater policy flexibility to implement rate cut.

Global monetary policy trends

In late 2024, following three rate cuts by the Fed, Malaysia has benefitted from the narrowing interest rate differential by keeping its OPR steady at 3%, due to the resilient domestic fundamentals. In contrast, most other Asian central banks, including those in Indonesia, South Korea and Thailand had already begun cutting rates to support their respective growth outlooks. In April, Singapore has also reduced its benchmark rate, responding to the anticipated slowdown in economic growth amid rising concerns over impending tariffs.

Although the Fed has since shifted to a wait-and-see approach, with policy decisions now highly data-dependent amid growing uncertainties under Trump’s administration, we believe BNM will remain focused on domestic economic conditions. In the case if external headwind weaken growth further, we believe BNM have rooms to implement OPR cut to bolster domestic spending and mitigate the fallout.

Therefore, should downside risks further weaken the economy due to external headwinds, we believe BNM has room and may start to ease the interest rate in second half of 2025 (2H25).

The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.