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Economy

Malaysia holds key interest rate steady despite COVID lockdown

Some economists expected a cut to ease economic pressure as infections surge

A soldier wearing a face mask enforces coronavirus restrictions in Kuala Lumpur on Jan. 13.   © Reuters

KUALA LUMPUR -- Malaysia's central bank kept its key interest rate unchanged on Wednesday, defying the expectations of some economists who had predicted an effort to ease pressure from soaring COVID-19 infections and a renewed lockdown.

The central bank's monetary policy committee, in a statement, said it was holding the overnight policy rate at 1.75%. The bank had already cut the rate four times since January last year, when the coronavirus crisis emerged.

"For Malaysia, the resurgence in COVID-19 cases and the introduction of targeted containment measures has affected the recovery momentum in the fourth quarter of 2020," the central bank said. But it added: "While near-term growth will be affected by the re-introduction of stricter containment measures, the impact will be less severe than that experienced in 2020."

The bank said it projects the economic trajectory will improve from the second quarter onward. "The improvement will be driven by the recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new manufacturing and mining facilities," it explained.

"The rollout of vaccines in the coming months will also lift sentiments."

Before Wednesday's decision, a Reuters poll showed nine of 15 economists predicting a cut to 1.5%, with one expecting an even bigger reduction to 1.25%. But opinions were divided: A Bloomberg survey of 24 economists showed them split on the likelihood of central bank action.

The current benchmark rate of 1.75% is the result of two 25-basis-point cuts last January and March, followed by a 50-point reduction in May and another 25-point move in July.

Malaysia's economy was hit hard in 2020 by a nearly three-month shutdown due to the coronavirus. Gross domestic product grew 0.7% in the first quarter but plunged 17.1% in the second, followed by a 2.7% contraction in the third. The fourth quarter GDP is expected to remain in the negative but show improvement thanks to a gradual reopening toward the end of the year.

Since late December, however, Malaysia has seen daily new COVID-19 cases skyrocket, surpassing the 4,000 mark -- up from the high triple digits in October. As of Tuesday, total cases stood at 165,371 with 619 deaths.

The latest wave of infections has prompted Prime Minister Muhyiddin Yassin's government to impose lockdowns in all but one state. With the king's consent, Muhyiddin this month also declared a state of emergency that could last until August, putting off an election that had appeared imminent.

The unemployment rate was already expected to swell to 5.5% -- the equivalent of 860,000 people -- by end of 2020, and is likely to worsen as a result of the new restrictions on economic activity.

The government has announced over $75 billion of stimulus plans, estimated to double its fiscal deficit to 6% based on over $12 billion worth of direct injections.

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