OCBC Revises Malaysia's Monetary Policy Forecast

BusinessToday

16-05-2025

Malaysia's economy expanded by 4.4% year-on-year in the first quarter of 2025, matching advance estimates, but signs of a broader slowdown have prompted OCBC Bank to revise its monetary policy forecast, bringing forward expectations of Bank Negara Malaysia (BNM) rate cuts to the second half of this year.
According to OCBC Malaysia's Senior ASEAN Economist Lavanya Venkateswaran, the unchanged GDP print—down from 4.9% in Q4 2024—masks underlying weakness in domestic demand and exports, both of which are expected to weigh on growth in the coming quarters.
'The final Q1 GDP figure reflects softening domestic consumption and investments, coupled with slower goods exports,' OCBC noted in its latest economic update. 'Given the rising external risks, particularly from US trade tariffs, we now expect BNM to cut its policy rate by a total of 50 basis points in 2H25, earlier than our previous forecast of 1H26″ she said.
Domestic Demand and Exports Show Signs of Fatigue
OCBC noted that the domestic final demand contributed 5.7 percentage points (pp) to GDP growth in Q1 2025, down from 6.0pp in Q4 2024. Household consumption growth moderated to 5.0%, while investment activity cooled to 9.7% from 11.8% in the previous quarter. Public sector spending remained stable, while government expenditure edged slightly higher to 4.3% from 4.0%.
Net exports added just 0.8pp to GDP growth, a sharp drop from 2.0pp in Q4 2024. Goods exports grew by only 1.6% year-on-year, while services exports held up relatively well, rising 16.9% amid continued strength in tourism inflows.
However, the Bank said inventory drawdowns continued to drag on growth, subtracting 2.2pp from headline GDP—a fifth consecutive quarter of negative contribution from inventories.
Sectoral Trends and External Balances
On the supply side, downward revisions were made to growth in the manufacturing, construction, and services sectors, although the construction and services sectors remained relatively resilient. The contraction in the mining and quarrying sector was revised to -2.7% from an earlier estimate of -4.9%.
Malaysia's current account surplus widened to RM16.7 billion (3.4% of GDP) in Q1 2025, up from RM12.9 billion in Q4, supported by a stronger goods trade surplus and a smaller secondary income deficit. However, the capital and financial account posted a wider deficit of RM20.2 billion, led by increased portfolio outflows and a slight decline in FDI inflows.
Growth Outlook Dampened by Global Uncertainty
OCBC projects Malaysia's GDP growth to slow further to 4.3% in 2025, down from 5.1% in 2024. Key downside risks include the imposition of US tariffs on Malaysian exports—particularly in sectors like semiconductors and pharmaceuticals—as well as a broader cooling in household and corporate spending due to growing global uncertainty.
The bank expects Malaysia's current account surplus to narrow slightly to 1.7% of GDP in 2025, from 1.4% last year.
'With businesses adopting a wait-and-see approach and households turning cautious, economic momentum could ease further,' OCBC said. 'This makes the case for a more accommodative monetary policy.'
BNM Signals Readiness to Act
At its latest meeting on 8 May, BNM adopted a more dovish tone, citing increased downside risks to the economy. The central bank also reduced the Statutory Reserve Requirement (SRR) from 2% to 1%, effective 16 May, injecting RM19 billion in liquidity into the system.
BNM Governor Tan Sri Abdul Rasheed Ghaffour commented that the central bank 'has the policy space to act if needed,' signaling readiness to support the economy if conditions deteriorate.
OCBC believes that the upcoming BNM meetings—scheduled for 9 July, 4 September, and 6 November—will be closely watched for signs of a rate cut, depending on incoming economic data and the outcome of US-Malaysia trade negotiations. Related