By Joseph Sipalan
KUALA LUMPUR (Reuters) - Malaysia's central bank, seeing more clouds over the global economy after Britain's Brexit vote, surprised markets by cutting its key interest rate for the first time in seven years in a bid to keep the country on a "steady growth path".
Bank Negara Malaysia (BNM) on Wednesday cut the overnight policy rate (OPR) <MYINTR=ECI>, steady since July 2014, by 25 basis points to 3.00 percent.
Global growth prospects have "become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom," the central bank said.
"International financial markets could also be subject to greater volatility going forward. In this light, global monetary conditions are expected to remain highly accommodative," it added.
The ringgit <MYR=> initially weakened slightly on the news, then turned firmer, rising 0.3 percent to 3.9700 per dollar. For the year, the ringgit has been the region's best-performing currency, strengthened 8.2 percent against the dollar.
Most government bond prices <0#MYBMK=> rose with the 10-year yield <MY10YT=RR> down to 3.637 percent, the lowest since November 2013. Malaysian stocks <.KLSE> rose fractionally after the cut.
All 13 economists in a Reuters poll had forecast no change to BNM's key rate as they did not see a strong push factor for a policy shift now.
"We're surprised in terms of the timing," said Euben Paracuelles, a Nomura economist in Singapore. "We expected a cut in either late Q3 or early Q4. I think BNM's preference is to be a bit more pre-emptive to counter external headwinds."
The central bank indicated it seeks to give the domestic economy a boost without creating any asset bubbles.
Domestic financial conditions are stable and "the risks of destabilizing financial imbalances have receded," BNM said, adding that more prudent lending standards have "contained speculative activities in the property market".
Southeast Asia's third-largest economy has posted five quarters of slowing growth, tied to weakness in global crude and commodity prices.
In January, Malaysia revised its 2016 growth projection downwards to 4.0-4.5 percent from 4.0-5.0 percent on expectations of a sustained slump in global crude prices.
The last time the central bank cut the benchmark rate was February 2009, when it was slashed by 50 basis points to 2.00 percent.
NO INFLATION WORRIES
BNM likely decided to cut now to take advantage of "a softer USD with fewer concerns regarding capital outflows", according to Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.
Inflation is not a worry at present, and the central bank on Wednesday cut its projection for 2016 to 2-3 percent from 2.5-3.5 percent. The annual pace was a seven-year high of 4.2 percent in February, but it slowed the next three months, reaching 2 percent in May.
BNM may consider further cuts later this year if global market conditions deteriorate, said Julia Goh, an economist for UOB Bank in Malaysia who, like many, expected a hold on Wednesday.
"They left the door open... if there is another adjustment it will probably be another cut to the OPR," Goh said.
Capital Economics said "we doubt this marks the start of an easing cycle".
(Additional reporting by Jongwoo Cheon in Singapore; Editing by Richard Borsuk)