Bank Negara Malaysia cut its overnight policy rate by 25 basis points to 2.75% from 3%, where it had been since May 2023, as had been expected by 17 of 31 economists surveyed in a Reuters poll.

The rate decision came a day after US President Donald Trump announced a 25% tariff on Malaysian exports to the United States.

BNM said the global growth outlook was weighed down by uncertainties surrounding tariffs, as well as geopolitical tensions, which could lead to greater volatility in global financial markets and commodity prices.

While the Malaysian economy was on a strong footing, the central bank said external uncertainties could affect Malaysia's growth prospects.

"The reduction in the OPR is...a pre-emptive measure aimed at preserving Malaysia's steady growth path amid moderate inflation prospects," the central bank said in a statement.

The ceiling and floor rates of the OPR corridor were correspondingly reduced to 3% and 2.5%, respectively.

Economists had expected at least one 25-basis-point cut this year, which would hold until the end of 2026, though there was no consensus on where the rate would be then. Estimates for the end of next year ranged from 2.25% to 3.00%.

Malaysia has reported a string of soft economic data in recent months with growth slowing to 4.4% in the first quarter, while exports unexpectedly fell in May.

Inflation has also remained relatively subdued, with consumer prices rising 1.2% in June, a four-year low.

In May, Prime Minister Anwar Ibrahim said that Malaysia was unlikely to meet its growth outlook of between 4.5% and 5.5% this year, while BNM has said it would have to lower its growth forecast range due to trade uncertainties.

The central bank also lowered banks' statutory reserve requirement (SRR) ratio by 100 basis points to 1.00% in May - the first SRR reduction since March 2020 at the start of the COVID-19 pandemic - reinforcing a dovish policy outlook.

The central bank expects continued growth in economic activity in the second quarter, underpinned by sustained domestic demand and export growth.

"Favorable trade negotiation outcomes, pro-growth policies in major economies, continued demand for electrical and electronic goods, and robust tourism activity could raise Malaysia's export prospects," the central bank said.

Malaysia's trade ministry said this week it will continue talking to its US counterparts "in good faith" to address outstanding issues, and clarify the scope and impact of the revised US tariffs.

Capital Economics said Malaysia's economic growth will remain under pressure as tighter fiscal policy, Trump tariffs and a drop in commodity prices weigh on domestic demand and export revenues.

"With growth likely to struggle and inflation concerns easing a little, there is plenty of room for the central bank to cut rates later this year," senior Asia economist Gareth Leather said in a note. He expects rates to be at 2.5% at the year-end.

Headline and core inflation averaged 1.4% and 1.9% in the first five months of the year respectively, the central bank said, adding that consumer prices are expected to remain moderate in 2025.

Inflationary pressure from global commodity prices is expected to remain limited, with the overall impact of domestic policy reforms on inflation expected to be contained, BNM said.

The central bank projects headline inflation to range between 2% to 3.5% in 2025, and core inflation at 1.5% to 2.5%. Both headline and core inflation came in at 1.8% in 2024.

BNM said the ringgit will be driven primarily by external factors, stating that favorable domestic economic prospects, structural reforms and ongoing measures to encourage flows will support the currency. It was last down 0.35% against the US dollar.