Investors are growing more confident that Malaysia, Southeast Asia’s last major economy yet to cut interest rates, will soon yield to rising economic strain from the global trade conflict.
Ringgit swap markets are now pricing in 30 basis points of rate cuts from Bank Negara Malaysia over the next six months, twice the level anticipated just a month earlier. Supporting this view, a recent auction of a three-year government bond, considered a key indicator of rate expectations, drew a bid-to-cover ratio of 3.18, the strongest demand seen for short- to mid-term notes since August.
A rate cut could encourage borrowing and investment, while also signalling to investors that Bank Negara Malaysia (BNM) is taking the global tariff-driven growth risks seriously and is prepared to support the economy amid rising uncertainty.
“Ringgit rates market has increased dovish bets for BNM,” stated Winson Phoon, head of fixed-income research at Maybank Securities Pte. He added that, given the weaker-than-expected first-quarter GDP and escalating global trade tensions, a rate cut would likely lead the three-year benchmark bond to outperform other segments of the yield curve.
Maybank predicts a 25-basis point rate cut by the end of 2025, with Goldman Sachs Group Inc. and CIMB Bank also expecting a 25-basis point easing this year, Bloomberg reports.
Malaysia's Q1 GDP growth of 4.4% year-on-year missed forecasts, marking the slowest pace in a year. Meanwhile, the inflation rate in March was the lowest in four years, with headline prices increasing by just 1.4%.
The International Monetary Fund, which recently downgraded its global growth forecasts, expects Malaysia's economy to grow by 4.1% in 2025, lower than the government’s current projection of 4.5%-5.5%, which is under review.
As expectations for rate cuts rise, Malaysia could see increased global inflows. However, the country attracted just $690 million in overseas investment into conventional government bonds in the first quarter, according to central bank data.
In contrast, foreign investors have invested about $2.1 billion in baht bonds this month, partly driven by dovish expectations for the Bank of Thailand.
Earlier this month, Malaysia’s central bank governor stated that officials have alternative policy tools to counter the effects of US tariffs. However, investors remain sceptical, citing signs of slowing domestic growth and inflation, along with the prospect of additional US tariffs.
Despite US President Donald Trump's 90-day pause on tariffs for further negotiations, his tariff policy continues to cast a shadow over the economy. This week, the US imposed solar tariffs on several countries, including a 34.4% levy on Malaysian manufacturers.
The US was Malaysia's second-largest export destination last year, following China, highlighting the significant impact of these trade tensions.