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Malaysia’s c.bank cuts rates to support recovery, spur inflation

KUALA LUMPUR, July 7 (Reuters) – Malaysia’s central bank cut its key interest rate for the fourth straight meeting to a record low as policymakers sought to support a budding recovery in Southeast Asia’s third largest economy, which has been battered by the coronavirus pandemic.

Bank Negara Malaysia (BNM) eased its overnight policy rate (OPR) by 25 basis points to 1.75% as expected by a slim majority of economists in a Reuters poll.

While the coronavirus-ravaged economy had begun to rebound recently after government restrictions to contain the virus were eased, the central bank flagged various domestic and external “downside risks” to that recovery from further outbreaks to weaker-than-expected global growth.

“Although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward,” the central bank said in a statement, referring to the outlook for the global economy.

“The MPC (Monetary Policy Committee) will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth.”

Malaysia’s economy grew just 0.7% in the first quarter, hit by the twin effects of the pandemic and plunging global energy prices.

The country has also faced political turmoil this year, with a new government taking over in March after former premier Mahathir Mohamad’s abrupt resignation caused political upheaval and the collapse of his administration.

Nearly three months of strict curbs on movement and businesses has sparked a bout of deflation, with consumer prices falling by an annual 2.9% in May – the third straight month of decline.

BNM said it expects inflation to be muted this year, with headline inflation likely to be negative on weak global oil prices.

“A temporary period of deflation isn’t too much of a worry, but if demand remains weak, there is a danger that deflation becomes permanent and starts to distort economic behaviour,” Alex Holmes, Asia economist for Capital Economics, said in a research note. (Reporting by Joseph Sipalan; Editing by Ana Nicolaci da Costa)


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