This article first appeared in The Edge Financial Daily, on July 18, 2016.

KUALA LUMPUR: Central banks took the centre stage last week, as Malaysia announced a surprise cut in its key interest rate last Wednesday, while the central banks of England and South Korea kept theirs at a record low to help spur economic growth.

Earlier last month, Indonesia’s central bank also surprised economists by cutting its benchmark interest rate for a fourth time this year, and expectations for further loosening are high in Japan. The Bank of Japan will decide its next move on July 29, after leaving its rates unchanged in negative territory in March as a way to stimulate its economy.

Their actions provide cautious investors with more reasons to suggest that the global economy is in far worse condition than expected, and this call is being reinforced by the dampening effect of Brexit on growth.

But independent economist Lee Heng Gui said there is no reason to be alarmed as Malaysia’s financial system is not in crisis mode to keep cutting rates to spur economic growth.

“We are still seeing growth, just that it’s not strong. We just have to allow ourselves to live with this reality that we have to go through this adjustment of slow growth for a while and wait for the next take-off, and that the take-off needs to come from domestic demand. This is because the external environment, with Brexit coming into play, will be very challenging over the next few years,” Lee told The Edge Financial Daily.

Last week, Bank Negara Malaysia (BNM) cut its overnight policy rate (OPR) by 25 basis points (bps) to 3% — its first rate cut since 2009 — citing “moderating growth” in major economies amid risks from the UK’s Brexit decision. Still, Lee said the interest rate cut serves as a minor boost to market sentiments and has limitations to stimulate economic growth.

“There will be some savings [for consumers] as banks will be recalibrating their interest rates on loans. But monetary policy has its limits. Can you rely solely on monetary policy to sustain consumer spending? The question then on the government’s part is, can they afford to do more?” he added, saying apart from adhering to a commitment towards fiscal consolidation and subsidy rationalisation, the government has to overcome structural weaknesses of the economy, such as high costs of living and doing business.

He noted that Malaysia’s economy over the past few years had been driven by domestic demand from household consumption, investment spending and the public sector.

Lee pointed to the government’s gross domestic product (GDP) growth forecast this year of 4% to 4.5%, which reflects weak contribution from exports to growth following more subdued demand from Malaysia’s key trading partners. “The government is not expecting exports to drive this year’s economic growth. The export engine, to me, could be a bigger drag next year.”

IHS Global Insight Asia-Pacific chief economist Rajiv Biswas forecasts that Malaysian GDP growth will moderate to 4.2% this year, from 5% in 2015.

“The largest negative impact from Brexit on Malaysian GDP growth is expected in 2017, as the full transmission effects, through trade and investment flows with the UK and EU (European Union), impact upon the Malaysian economy,” he said in a note on July 13.

Rajiv is of the view that BNM’s latest decision took advantage of a likely delay in the US Federal Reserve rate hike and a further easing of monetary policy by the Bank of England due to the impact of Brexit.

“While Malaysian exports to the UK account for only a very small share of total Malaysian exports, the 28-member European Union accounted for 10% of total Malaysian merchandise exports in 2015, making the EU Malaysia’s third-largest export market. Any substantial slowdown in [the] EU’s GDP growth is expected to have significant negative-impact effects on Malaysian exports,” he said.

“Given the backdrop of China’s economic slowdown and the negative effects of slumping oil prices on Malaysia, Brexit will add to global financial market uncertainty, creating another downside risk to the Asia-Pacific and Malaysian growth outlook for 2017,” Rajiv added.

International foreign-exchange broker ForexTime Ltd analyst Lukman Otunuga said concerns had heightened over a potential recession in the UK, and if this leaks into the global economy, sentiment could take a blow, punishing global stocks.

He noted that oil prices had been bearish for an extended period and may remain bearish as oversupply concerns haunt investor attraction.

“With fears still lingering that demand may be waning amid fears over slowing global growth, oil prices may be poised to depreciate lower in 2016. The combination of excessive oversupply and waning demand could force low oil prices to be the dominant theme moving forward. From a technical standpoint, WTI crude is bearish and a decisive breakdown below US$44 (RM173.36) could open a path towards US$40,” Otunuga said in a note on July 14. The price of WTI crude closed at US$45.95 last Friday.

CIMB Investment Bank Bhd head of research Michael Greenall said while it would take two years for Brexit to be fully completed, the greater danger lies in dissatisfied EU member countries possibly opting to exit the bloc as well.

“The economic repercussions of such a contagion effect could be large and cause [a] global slowdown. This would have [a] negative impact on Malaysia, from [a] slowdown in demand for exported goods. This is the reason that we like companies geared to the domestic consumption spending story,” he said in his strategy note on July 14.

Greenall sees the property sector and real estate investment trusts immediately gaining from BNM’s latest decision.

He said prospects are also bright for construction and related sectors with RM30 billion of works tendered out year to date and another RM60 billion due in the second half of 2016. “Pump-priming will have [a] trickle-down impact on the economy and could spur consumption spending.”

Meanwhile, economists are of the view that if domestic data continues to follow a tepid path amid Brexit anxieties, further cuts and interventions by central banks could be commonplace in the future.

AmBank Research said should consumer confidence in Malaysia, which started to improve in the first quarter of this year, and business sentiment, which bottomed out in the fourth quarter of 2015, take a dip going forward, dragged by uncertainties and challenges, the OPR is likely to be reduced by up to 75bps.

“And if the economy remains unexciting, we foresee BNM to possibly move into negative real returns of around -0.5% to -1%,” the research firm said in a strategy report on July 14.