[KUALA LUMPUR] Bank Negara Malaysia left its benchmark interest rate unchanged at 2.75 per cent on Thursday (Sep 4), noting that the global economy is expanding but remains fragile.
The decision to keep the overnight policy rate (OPR) steady was widely expected, with 29 of 32 economists in a Reuters poll forecasting no change.
At its previous policy review in July, the central bank reduced OPR by 25 basis points, the first easing since July 2020.
In its latest statement, Bank Negara noted that global growth continues to expand, driven by steady consumer spending and front-loading activities. While the completion of some trade negotiations has reduced uncertainty, risks remain as new tariffs come into effect and the boost from earlier trade activity fades.
The central bank noted that potential escalations in geopolitical tensions and further product-specific tariffs could dampen sentiment and increase volatility in global financial markets as well as commodity prices.
“At the current OPR level, the monetary policy committee considers the monetary policy stance to be appropriate and supportive of the economy amid price stability,” Bank Negara said.
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It expects Malaysia’s growth to continue in 2026, driven by strong domestic demand. Investment will be supported by ongoing multi-year and national master plan projects.
Economists observed that the central bank’s latest statement is less dovish than its previous one, signalling confidence in future growth.
OCBC senior Asean economist Lavanya Venkateswaran said Bank Negara is not expected to “move the needle on the policy rate” for now, unless growth faces a significant downturn.
RHB Bank senior economist Chin Yee Sian echoed the sentiment, noting that future monetary policy will be data-dependent, and largely affected by the impact of trade tariffs on Malaysia’s exports as well as the strength of consumer spending.
Declining retail sales
Recent findings by Retail Group Malaysia (RGM) provide a different perspective, as the country’s retail industry experienced a modest 1.5 per cent year-on-year growth in the first six months of 2025.
Specifically, the retail performance for the second quarter declined 3 per cent year on year, underperforming the industry’s earlier projection of a 1 per cent decrease.
In light of these details, RGM cut its full-year growth forecast for the retail industry to 2.7 per cent, from its previous estimate of 3.1 per cent.
Nonetheless, it noted that the July rate reduction was a proactive move to protect the economy.
“Lower interest rates would reduce consumer mortgage payments, freeing up more money for discretionary spending on items like cars and electronics,” RGM said in a report on Thursday.
Fading impact
However, the fading impact from front-loading activities and declining domestic demand continue to be key concerns for gross domestic product growth in the coming quarters.
Venkateswaran expects a slower expansion of 3.5 per cent in the second half of 2025, compared with 4.4 per cent in the first half of the year.
This would bring the overall GDP growth for 2025 to 3.9 per cent, below Bank Negara’s forecast of 4 to 4.8 per cent, she said.
OCBC projects GDP to grow 3.8 per cent in 2026. It anticipates growth dampening in the first half due to the “base effects” of earlier export activities, which will also affect the wholesale and retail sectors. However, growth is expected to pick up more substantially in the second half of that year.
For the rest of 2025, RHB Bank forecasts OPR to stay at 2.75 per cent. This projection, however, is contingent on Malaysia’s GDP growth staying within the official 4 to 4.8 per cent range, and inflation remaining contained.
Chin noted that the positive outlook is supported by several factors, such as the unemployment rate continuing to improve to 3 per cent, and catalytic schemes such as the RM2 billion (S$610 million) Merdeka cash handouts modestly boosting consumption.
Moderating inflation
Inflation remains contained, with headline and core inflation averaging 1.4 per cent and 1.9 per cent, respectively, in the first seven months of 2025.
Bank Negara said the easing trend in global commodity prices is expected to contribute to moderate domestic cost conditions.
Core inflation is expected to remain stable and close to the long-term average, reflecting continued expansion in economic activity and the absence of excessive demand pressures.
“This trend is expected to continue going into 2026. In this environment, the overall impact of the announced and upcoming domestic policy reforms on inflation is expected to be contained,” the central bank said.
