[KUALA LUMPUR] Malaysia’s central bank kept its key interest rate steady at 3 per cent on Thursday (May 8), opting for policy stability amid resilient domestic demand and a better-than-expected rebound in industrial activity, even as clouds gather over global trade due to rising US tariffs and geopolitical tensions.
Bank Negara Malaysia said the decision to maintain the overnight policy rate (OPR) was supported by continued global growth and trade activity, alongside firm domestic demand and front-loading of exports ahead of potential tariff changes.
“At the current OPR level, the monetary policy stance is consistent with the current assessment of inflation and growth prospects,” the central bank said in a statement.
Malaysia’s first-quarter economic activity remained positive, backed by robust consumer spending and expanding exports. However, the central bank warned that the global outlook has weakened, with the balance of risks now tilted to the downside.
“This outlook remains subject to considerable uncertainties, which include outcomes of trade negotiations and geopolitical tensions. Such uncertainties could also lead to greater volatility in the global financial markets,” it said.
The biggest downside risks to Malaysia’s outlook stem from a sharper slowdown in major economies, weaker investor and consumer sentiment due to prolonged uncertainty, and lower-than-expected output from commodity sectors.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia’s fast-growing economies.
On the other hand, stronger tourism recovery and pro-growth policies in key markets could lift prospects, said Bank Negara Malaysia.
Cooling momentum
Ahead of Bank Negara Malaysia’s rate decision on Thursday, a Reuters poll indicated a median expectation for interest rate cuts to commence in the final quarter of 2025.
This forecast came despite positive economic indicators, including a four-year low inflation rate of 1.4 per cent in March and a strong estimation of 4.4 per cent first-quarter gross domestic product growth.
Malaysia will announce the first-quarter GDP figures on May 16.
Chua Hak Bin, regional co-head of macro research at Maybank Investment Bank, said policymakers are watching both downside risks to growth and upside inflation pressures.
“Given that monetary policy works with a lag, the likely rate path ahead is a single 25-basis-point cut in the second half of 2025, followed by pauses to assess changes in economic conditions and global geopolitical tensions before considering further actions,” he said.
He noted that Malaysia’s economy has been slowing over three straight quarters, from a high of 5.9 per cent year-on-year growth in the second quarter of 2024 to an estimated 4.4 per cent in the first quarter of 2025.
Growth is expected to remain subdued below 5 per cent in the current quarter, with a possible dip below 4 per cent if trade frictions escalate, he added.
Industrial production beats forecasts
Malaysia’s industrial production index (IPI) rose 3.2 per cent year on year in March, beating the 2 per cent forecast in a Reuters poll and stronger than February’s 1.5 per cent increase.
On a monthly basis, output jumped 9.3 per cent, rebounding from a 6.8 per cent contraction in February.
According to the data by the Department of Statistics Malaysia, manufacturing output grew 4 per cent in March, easing slightly from 4.8 per cent a month earlier.
Mining output expanded 1.8 per cent, reversing an 8.9 per cent contraction in February. Electricity generation declined 2.7 per cent, slightly better than February’s 2.8 per cent fall.
Export-oriented sectors posted slower growth of 4.8 per cent, down from 5.7 per cent, mainly driven by electronics, optical products and processed oils and fats.
Domestic-oriented industries rose 2.3 per cent, also lower than February’s 2.9 per cent, supported by food processing and fabricated metal products.
Tariff threats
Economists Chin Yee Sian and Wong Xian Yong from RHB Research flagged rising trade tensions as a growing risk to Malaysia’s manufacturing outlook.
They cited the recent US move to impose a 10 per cent tariff on Malaysian goods – potentially rising to 24 per cent after a 90-day suspension – as a direct threat to exports.
“Malaysia’s economic prospects have become more uncertain, shaped by shifting global tariffs and ongoing ambiguity around US trade policy,” the economists said in a note.
They expect a short-term boost to exports due to front-loading during the tariff pause, but warned that prolonged global uncertainty and softening demand could weigh heavily on the sector going forward.
While Malaysia could benefit from some trade diversion – thanks to lower Asean tariffs compared to the US-China levels – it will not fully offset the risks posed by a slower global economy, they added.
Inflation seen as contained
Inflation remains in check, with headline and core inflation averaging 1.5 and 1.9 per cent, respectively, in the first quarter of 2025. Bank Negara Malaysia expects inflation to remain manageable, supported by moderate global cost conditions and a lack of strong domestic price pressures.
Global commodity prices are projected to trend lower, further easing cost pressures. While domestic policy reforms may affect prices, the central bank said their overall impact is likely to be contained.
“Risks to inflation would be dependent on the extent of spillover effects of domestic policy measures, as well as external developments surrounding global commodity prices, financial markets and trade policies,” said the central bank.
The ringgit’s performance, meanwhile, will continue to be influenced by external developments, including interest rate differentials and investor sentiment, it added.
The ringgit has shown modest strength, trading at 4.2745 per US dollar as at May 8 – up 4.4 per cent from 4.4715 at the start of the year.
“Malaysia’s favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit,” said the central bank.
