BANK Negara yesterday cut the three-month intervention rate by 50 basis points (0.5%) to 4.5% to spur domestic consumption.
Subsequently, the ceiling base lending rate (BLR) for the commercial banks will accordingly fall to 6% from 6.42%, while BLR for finance companies will decline to 6.94% from 7.46%.
In a statement, the central bank said it would ensure that the inter-bank rates were maintained at current ranges. “This will minimise the adjustment to deposit rates,” it added.
The 3-month Klibor (Kuala Lumpur Interbank Offer Rate) was unchanged at 3.14% yesterday.
Bank Negara said the rising external reserves against low debt levels, subdued inflation and a strong banking sector provided the policy flexibility for the government to mitigate any worsening of external conditions by domestic sources of growth.
The central bank remains confident that the cumulative effects of structural adjustments and macroeconomic policies will support long-term sustainable growth.
Bank Negara said the measures being implemented would address immediate concerns of risks to growth.
It would reinforce other longer-term measures to ensure that growth in the medium term will be more in line with potential output, the statement added.
The cut in intervention rate came as no surprise to the financial markets.
Some analysts have, in fact, revised their earning forecasts to factor in a rate cut this year.
Meanwhile, the local bond market has staged a rally in the past few trading days in anticipation of a rate cut.
The fall in real interest rate that came together with a drop in Consumer Price Index (CPI) in March had made it justifiable for Bank Negara to slash the intervention rate now, said TA Securities head of research C.K Ngu.
Bank Negara's remark on “minimum adjustment deposit rates” has been interpreted as advice to the banks not to adjust deposit rates.
Consequently, the profit margin of commercial banks will be squeezed as a result of lower BLR with deposit rates being unchanged.
An analyst with a foreign-based stockbroking firm expects earnings in banks to fall between 6% and 8%, should the deposit rates be maintained at current levels. However, Ngu sees the possibility of banks revising the deposit rates downward.
The impact on margin squeeze would vary among the banks.
Banks that have more loans that are pegged to BLR (floating rate loans) would be affected more than those with less, according to analysts.
Finance companies will be less affected because their loans are not fixed rate loans.
Hence, the impact on the bottomlines of banking groups such as Public Bank, AMMB Holdings and Hong Leong Bank, with their relatively larger finance operations, would be less severe.
In comparison, the portfolios of RHB Bank and Bumiputra-Commerce Bank had a relatively high portion of loans that are pegged to BLR, said an analyst.
On the impact of lower BLR on generating loan growth, analysts have differing opinions.
Ngu said the rate cut would help to boost private consumption because the existing borrowers would have extra money to spend.
But he does not expect lower BLR to lift demand for properties and motor vehicles significantly because most of the existing loan packages are already below the BLR. However, OSK Research banking analyst Karin Phua said a margin squeeze in the banks could be mitigated by more lending activities in consumer loan segment that would generate top line growth for the banks.