Limited impact seen from Bank Negara's rate cut

Alliance Investment Bank chief economist Manokaran Mottain (pic) told StarBiz that the last paragraph in the monetary policy statement was a hint of what could be ahead.

PETALING JAYA: Bank Negara’s decision to cut the benchmark interest rate may have limited impact on borrowing cost as several banks in the country have raised their lending rates prior to the central bank’s announcement.

Experts told StarBiz that households and businesses servicing loan payments would still enjoy lower instalments, but the savings in their monthly repayments may not entirely reflect Bank Negara’s 25-basis-point (bps) reduction in the overnight policy rate (OPR).

Following macroeconomic headwinds and signs of tightening of financial conditions, the Monetary Policy Committee of Bank Negara reduced the OPR to 3% from 3.25% at its meeting yesterday.

According to MIDF Research analyst Imran Yassin Yusof, more than five banks have increased their base rate by an average of 10bps, on expectations of the OPR cut.

“Based on our observation, several banks have raised lending rates by 10bps on average. With this rate cut by Bank Negara, lending rates of the banks will go lower but not by 25bps,” Imran said.

The change in the OPR marks the first revision in a year and the first cut in nearly three years. The OPR was last cut in July 2016 to 3%, following the Brexit vote in the UK.

In January last year, Bank Negara raised the key rate to 3.25%.

The central bank’s move to slash the key interest rate came in line with consensus expectations. Based on a Bloomberg poll, 14 economists among 23 respondents had predicted a 25-bps cut in the OPR.

Alliance Bank chief economist Manokaran Mottain told StarBiz that a lower OPR is typically expected to spur borrowing activities and, in turn, stimulate the domestic economy.

“Theoretically, a lower OPR would boost disposable income and lift private consumption.

“However, given the increase in lending rates by some banks before the OPR was reduced, I think the central bank’s intention to lower borrowing costs may not be entirely met,” he said.

Manokaran also added that the rate cut by Bank Negara came earlier than expected, signalling the country’s weak economic outlook.

“I predicted the central bank to do a rate cut only in July. The OPR cut is Bank Negara’s pre-emptive measure in anticipation of a slower economic growth in the coming quarters.

“As for the first quarter of 2019, gross domestic product could grow by 4.5%, within Bank Negara’s full-year expectation of 4.3% to 4.8%,” he said.

In a statement yesterday, Bank Negara said that latest developments in Malaysia point towards moderate economic activity in the first quarter of 2019.

“Looking ahead, slowing global demand conditions and subdued growth of key trading partners will continue to weigh on the external sector. Domestically, stable labour market conditions and capacity expansion in key sectors will continue to drive household and capital spending.

“However, there are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors,” said the central bank.

On inflation, Bank Negara expected it to remain low in the immediate term, mainly due to policy measures such as the price ceiling on retail fuel prices and the change in the consumption tax policy.

“For 2019 as a whole, average headline inflation is expected to be broadly stable compared with 2018,” it said.

Bank Negara also pointed out that there are some signs of tightening of financial conditions, although domestic monetary and financial conditions remain supportive of economic growth.

“The adjustment to the OPR is, therefore, intended to preserve the degree of monetary accommodativeness,” the central bank pointed out.

Commenting on Bank Negara’s latest decision, Socio-Economic Research Centre executive director Lee Heng Guie said the central bank’s stance on the economy has turned more cautious.

“The rate cut reflects underlying risks to the economy. A lower OPR could preserve economic outlook,” he said.

While lending rates will be reduced by banks following the rate cut, banks could tighten the returns on deposits to maintain profit margins, according to Lee.

“Eventually, the gains from the OPR cut would likely be balanced out,” he said.

Echoing a similar view, MIDF Research’s Imran said the banks may likely “re-price bank deposits” to avoid compression in net interest margins (NIM).

NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors.

“The effects of an OPR cut would normalise in one or two quarters. The impact of the rate cut on borrowing costs would likely be muted,” he said.

However, Imran pointed out that the banking sector’s loan growth would pick up slightly and in a gradual manner, following the lower OPR.

“But we won’t see a sharp acceleration,” he said.

Speaking with StarBiz, a property sector expert said the lower OPR is a “good move to stimulate the property market”.

“Interest rates have a profound effect on the influence of an individual’s ability to purchase residential properties, by increasing or decreasing the cost of mortgage.

“It also has an impact on the value of income-producing real estate as an investment vehicle,” he said.