Malaysia Faces Economic Uncertainty Amid US Tariff Threats

Malaysia is bracing for potential economic turbulence as the United States imposes a 24% reciprocal tariff on its imports, a move that could prompt Bank Negara Malaysia, the central bank, to reassess its monetary policy. While the overnight policy rate (OPR) has remained steady at 3% since May 2023, experts warn that sustained trade disruptions and global uncertainties may force a reevaluation of this benchmark lending rate in 2025. With negotiations underway during a 90-day tariff pause affecting over 75 countries, the outcome could determine whether Malaysia faces a reduced tariff, maintains the current rate, or sees it lifted entirely.

US Tariffs Cast a Shadow Over Economic Outlook

On April 2, 2025, the US government introduced baseline tariffs of 10% on all imports, followed by reciprocal tariffs on trade partners on April 9. For Malaysia, the proposed 24% tariff represents a significant challenge, given that the United States accounts for 13.2% of the country’s total exports, making it the second-largest export market. If implemented, this tariff could disrupt trade flows, dampen export performance, and impact foreign direct investment (FDI), key drivers of Malaysia’s economic growth.

During the temporary 90-day pause, negotiations between the US and affected countries, including Malaysia, will shape the future of these tariffs. The uncertainty surrounding the outcome has heightened concerns among policymakers and economists, with many suggesting that a prolonged or escalated trade conflict could exacerbate downside risks to Malaysia’s economy. While exporters may frontload shipments to the US in the near term to mitigate immediate losses, the longer-term implications remain unclear.

Bank Negara’s Cautious Stance on Monetary Policy

Bank Negara Malaysia has so far maintained a neutral stance on the country’s growth outlook, with the OPR unchanged at 3% following the Monetary Policy Committee (MPC) meeting in March 2025. However, the looming threat of sustained tariffs has led to speculation about potential rate adjustments. Economist Anthony Dass, senior economic adviser at KSI Strategic Institute for Asia-Pacific and executive director at the Malaysian Institute of Economic Research (MIER), highlighted that while the central bank is unlikely to lower rates based solely on tariffs, external shocks could necessitate a reassessment.

“While the OPR is currently maintained at 3%, downside risks from escalating trade headwinds could warrant a reassessment should external shocks significantly weaken the macroeconomic outlook” said Dass. He emphasized that any monetary easing would depend on factors such as a sustained decline in export performance, subdued inflation, and a stable ringgit to avoid destabilizing capital markets or eroding investor confidence.

Other experts echo this cautious approach. Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, noted that the OPR cannot directly address trade-related challenges, which are rooted in the fundamental dynamics of Malaysia’s economy and its relationship with the US. “Monetary policy support could follow once it’s clear that growth and the real economy have been hit” she said, underscoring the central bank’s focus on preventing a further decline in market sentiment and managing foreign exchange volatility in the interim.

Domestic Resilience Amid External Pressures

Despite the external headwinds, Malaysia’s economy shows pockets of resilience. Domestic demand remains a primary engine of growth for 2025, supported by a robust labor market, steady wage increases, and accommodative fiscal measures. Large-scale public infrastructure projects, direct fiscal transfers to lower-income groups, and a recovering tourism sector provide additional buffers against global trade disruptions. Venkateswaran also pointed to the government’s medium-term agenda for key sectors like semiconductors and efforts to diversify trade partners beyond traditional hubs like Selangor and Penang into regions such as Johor as positive steps for growth.

However, these strengths may not fully offset the broader drag from a deteriorating global trade environment. Dass has revised his 2025 GDP growth forecast downward from a range of 4.5% to 5.5% to between 4% and 4.9%, reflecting the potential impact of tariffs and shifting supply chains. Other analysts, including Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia Bhd, have adjusted their projections as well, lowering GDP forecasts from 4.7% to 4.1%. The official GDP growth target for 2025 remains between 4.5% and 5.5%, compared to 5.1% in 2024, but achieving this range may prove challenging if trade tensions persist.

Differing Views on Rate Cuts

Opinions on the likelihood of an OPR adjustment vary among experts. Mohd Afzanizam suggests that a 25-basis-point cut in the second half of 2025, possibly during the July MPC meeting, could be appropriate if inflation risks remain contained. “There is always a chance that the central bank might want to lower the OPR as the tariff would compromise the outlook on Malaysia’s export” he said, highlighting the material impact of reduced US demand on the local economy.

In contrast, Carmelo Ferlito, CEO of the Centre for Market Education, argues that lowering interest rates under the current circumstances could be ineffective or even harmful, particularly with potential pressures on the ringgit. “Gradually, the actual intentions of the US government, it seems to me, is that the ultimate goal is not the tariff per se but forcing trading nations back at the discussion table with the US for them to regain a prominent role in the international trade scenario” he said. Ferlito advises close monitoring of international trade trends to assess the real impact of tariffs before making policy decisions.

Meor Amri Meor Ayob, CEO of Bond Pricing Agency Malaysia, noted that the Malaysian bond market has already begun pricing in the possibility of rate cuts in 2025, reflecting expectations of a more accommodative stance by Bank Negara. An easing of monetary policy could serve as an indirect response to cushion the economic fallout from reduced exports if demand for Malaysian goods weakens under the new tariff regime.

Broader Implications for Investment and Growth

Beyond immediate trade impacts, the tariff uncertainty could influence investor sentiment and FDI inflows, areas where Malaysia has been a major beneficiary in recent years. Yun Liu, HSBC ASEAN economist, cautioned that while exporters might see a temporary boost from frontloading shipments in the second quarter, the prevailing uncertainty could lead investors to adopt a ‘wait-and-see’ approach. “Despite external risks, Malaysia is seeing some pockets of domestic resilience. Private consumption was holding up while the country is seeing an investment boom in the public infrastructure space, partially offsetting some external risks” she said.

However, Liu also noted that Bank Negara might need to reassess downside risks to growth following the tariff pause, particularly for export-oriented economies like Malaysia. The central bank, which previously maintained a relatively neutral outlook, could shift its stance if negotiations fail to yield favorable outcomes.

Looking Ahead: Navigating a Complex Landscape

As Malaysia navigates this complex economic landscape, the interplay between domestic resilience and external pressures will shape its path forward. Bank Negara’s response will likely hinge on the outcome of US negotiations and the broader trajectory of global trade dynamics. While domestic strengths provide a buffer, the potential for sustained tariffs and retaliatory measures poses significant challenges to net exports, private investment, and foreign capital flows.

For now, the central bank appears poised to maintain stability, prioritizing sentiment and foreign exchange management over premature rate adjustments. Yet, as the tariff saga unfolds, questions linger about the long-term impact on Malaysia’s economic outlook and whether monetary policy tools can adequately address trade-driven disruptions. With growth forecasts already revised downward, the coming months will test the country’s ability to balance internal momentum with an increasingly volatile global environment.