We expect Bank Negara Malaysia (BNM) to cut its overnight policy rate (OPR) by 50bps to 2.50% by the end of 2025. The central bank maintained its OPR at 3.00% for the 12th consecutive meeting on May 8, but slashed its statutory reserve requirement ratio (SRR) by 100bps to 1%, effective May 16. This marked the first SRR reduction since March 2020, injecting ~MYR19bn worth of liquidity into the banking system. We saw BNM leaving the door open for monetary policy easing in 2H25 with a more downbeat economic growth outlook. On its monetary policy stance, BNM omitted the phrase ‘remains supportive of the economy’ from its statement, which was present in past decisions this year, although assessing it to be consistent with growth and inflation prospects.
BNM recognised downside global risks from escalating global trade tensions from evolving US tariff developments and retaliatory measures, which would spill over negatively onto Malaysia’s external-oriented sectors and exports. Malaysia’s economic growth faces downside risks from deeper economic slowdown in major trading partners, weaker sentiment, and lower-than-expected commodity production, although anchored by resilient domestic demand from supportive household spending and sustained investment expansion. BNM did not mention its 2025 economic growth forecast (DBSf: 4.0%), but its cautious rhetoric aligned with Prime Minister Anwar Ibrahim’s comments during a special parliamentary session on May 5 that Malaysia was likely to miss its official 2025 growth projection range of 4.5-5.5%. Malaysia’s headline inflation eased further to 1.5% YoY in 1Q25. While inflation faces potential upside pressures from RON95 subsidy rationalisation, BNM anticipates manageable inflation for 2025 due to easing global commodity prices and a lack of excessive domestic demand pressures. We revise our 2025 headline inflation forecast to 1.8% (from 2.8%), with contained inflation providing room for BNM to loosen monetary policy and support slowing economic growth. We see downside risks to our growth and interest rate forecasts from heightened tariffs uncertainties, particularly potential US semiconductor import duties.
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