Malaysia central bank eyes reforms to counter US tariff fallout

[MALAYSIA] Malaysia's central bank is going beyond monetary policy to deal with the consequences from US President Donald Trump's actions, arguing that the country is entering tariff negotiations from a position of strength.

In an interview with Bloomberg TV, Bank Negara Malaysia (BNM) governor Abdul Rasheed Ghaffour stated that strong investment activity, resilient domestic demand, and diverse trade partners will help to support the economy. Policymakers also have a variety of instruments at their disposal to reduce the impact of broad US tariffs.

The US tariffs, which target key Malaysian exports such as semiconductors and electrical equipment, come at a time when global supply chains are still recovering from pandemic-era disruptions. Analysts warn that prolonged trade tensions could dampen Malaysia’s export-reliant growth model, which accounts for nearly 70% of GDP. However, the country’s strategic pivot toward regional trade partners, particularly within ASEAN and China, may help cushion some of the blow.

"Monetary policy cannot end trade conflicts. It's not the best tool for the job," he stated on April 9. "What is crucial to us is the mandate that we want. We want to create price stability that will result in long-term economic progress for the country."

Traders are pricing in a 25 basis point fall in the BNM's policy rate over the next six months, according to Bloomberg swaps data, as broad US tariffs raise concerns about slowing growth. Economists have reduced their GDP projections for Malaysia in 2025, which faces a 24% tariff.

The potential rate cut would mark a shift from BNM’s previous stance, which prioritized inflation control amid rising commodity prices. However, with global demand uncertainties intensifying, the central bank appears to be leaning toward supporting growth. Market watchers suggest that any easing would likely be gradual, given the ringgit’s sensitivity to interest rate differentials with the US Federal Reserve.

The central bank has maintained the benchmark rate at 3% since May 2023, following a year-long tightening cycle. Mr Abdul Rasheed stated that it expects prolonged ringgit volatility and is prepared to limit any excessive fluctuation. Any currency intervention is done with caution to guarantee a stable market, he noted.

Authorities are examining the impact of US tariffs and have revised their prediction for economic growth this year from 4.5 to 5.5 percent. There are hints that growth may be faltering, as January industrial production fell short of analyst expectations.

Meanwhile, Malaysia’s government is reportedly in talks with private sector leaders to accelerate domestic investment initiatives, particularly in high-value sectors like renewable energy and technology. These efforts align with BNM’s emphasis on structural reforms to reduce reliance on external demand. Officials have hinted at potential fiscal incentives to spur private capital expenditure, which could offset some of the drag from weaker exports.

While the central bank is assessing the growth prediction, "we're not in a hurry to change it now because things are still very fluid," Mr Abdul Rasheed explained. It is critical that the government double down on structural changes to enhance the economy and give long-term support for the ringgit, he said.

Malaysia is planning to boost petrol prices for the country's wealthiest 15% by 2025 in order to decrease subsidies on its most popular grade, known as RON95. The central bank has maintained that its impact on inflation will be limited, with consumer prices rising by 2 to 3.5 percent in 2025.

The subsidy rationalization plan, while politically sensitive, is seen as a critical step toward fiscal sustainability. Economists estimate that redirecting savings toward targeted social assistance and infrastructure could add up to 0.3 percentage points to GDP growth over the medium term. However, the timing of the measure has raised concerns, as households already face higher costs due to the weaker ringgit.

Efforts to encourage state-linked enterprises and investment institutions to repatriate foreign investment revenue and convert it to local currency will continue, he said, boosting the ringgit.

The central bank also meets with exporters and importers on a regular basis to encourage them to manage their foreign-exchange activities responsibly, such as changing export profits into ringgit more quickly. In April, the ringgit, which was the top performer among emerging markets in 2024, fell alongside its developing-economy counterparts.