KUALA LUMPUR : Investors are increasingly predicting that Malaysia, one of Southeast Asia’s last holdouts against interest rate cuts, will soon ease monetary policy as the economic toll from the global trade war intensifies.
Pricing in the ringgit swaps market now reflects expectations of a 30 basis point rate cut by Bank Negara Malaysia (BNM) within the next six months — double the forecast from just a month ago. The sentiment was echoed in a recent auction of a three-year government bond, which saw a bid-to-cover ratio of 3.18 times, the highest since August for short-to-mid-term papers.
A reduction in rates is expected to spur borrowing and investment activity, while signalling that BNM is growing increasingly concerned about the country’s growth outlook amid tariff-related uncertainty.
“Ringgit rates market has increased dovish bets for BNM,” said Winson Phoon, Head of Fixed Income Research at Maybank Securities Pte Ltd. He added that a rate cut would likely make the three-year benchmark bond outperform other maturities on the yield curve.
Maybank, Goldman Sachs, and CIMB Bank all anticipate a potential 25 basis point cut later this year, with Maybank expecting it to materialise by end-2025.
Malaysia’s economy expanded 4.4% year-on-year in the first quarter — the slowest pace in a year and below market expectations. Inflation also remains muted, with March headline prices rising only 1.4%, the lowest increase in four years.
The International Monetary Fund recently revised Malaysia’s 2025 growth forecast to 4.1%, down from earlier estimates and below the government’s current target of 4.5%-5.5%, which is now under review.
Investor anticipation of policy easing could help attract more foreign inflows. In the first quarter, Malaysia recorded US$690 million in foreign investment into its conventional government bonds. By contrast, Thailand’s bond market received US$2.1 billion this month, as dovish sentiment around the Bank of Thailand gained traction.
Elsewhere in the region, countries such as Indonesia, Thailand, the Philippines, and Singapore have already moved to ease monetary policy since the latter half of 2024. Although Bank Indonesia held rates steady this week, it signalled further room for easing.
BNM’s governor has said that Malaysia has other policy tools to address the impact of US tariffs. Still, investors appear unconvinced, particularly as economic indicators soften and the US continues to tighten its trade stance.
Despite US President Donald Trump’s 90-day tariff pause to allow for more negotiations, his broader trade policies still cast a shadow. This week, Washington imposed new solar tariffs on multiple countries, including a 34.4% duty on Malaysian manufacturers.
The United States remains Malaysia’s second-largest export destination after China, making the stakes especially high. Trade Minister Tengku Zafrul Aziz is scheduled to meet US Trade Representative Jamieson Greer in Washington today, as Malaysia seeks exemptions or adjustments to the imposed tariffs.
Malaysia, along with China, Vietnam, Hungary and Mexico, ranks among the most vulnerable emerging markets to tariff-related economic disruption, according to Goldman Sachs strategists Andrew Tilton and Kamakshya Trivedi.
