PETALING JAYA: Bank Negara has gone full-throttle to accelerate Malaysia’s economic recovery after it slashed the benchmark interest rate to 1.75%, an all-time-low since the central bank adopted the overnight policy rate (OPR) framework in 2004.
This is a clear message that there continues to be a need for cheaper funds, particularly in reinvigorating consumption and investments.
The OPR was cut by 25 basis points (bps) from 2% earlier, marking it the fourth round of cuts this year.
“The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2% and 1.5% respectively, ” stated Bank Negara.
The central bank is cognisant of the fact that broad-based weakness in labour markets and precautionary behaviour by households and businesses remain a major headwind for the domestic economy.
This was despite its hint that the economy will recover from the current third quarter onwards, judging from its view in the latest Monetary Policy Committee (MPC) statement that “a trough is expected in the second quarter”.
“The projected improvement in the domestic economy is expected to be further supported by a gradual recovery in global growth conditions.
“The pace and strength of the recovery, however, remain subject to downside risks emanating from both domestic and external factors, ” it added.
Theoretically, a lower OPR would be able to stimulate the purchase of big-ticket items such as vehicles and property, which are generally funded by borrowings.
Businesses would also be more inclined to borrow for expansion or investment purposes, as a reduction in the OPR lowers borrowing costs.
In a subdued economic environment where the growth in private consumption has slowed substantially and new loan applications have declined year-on-year for three consecutive months, cheaper borrowings should help in spurring demand.
However, continued poor sentiment in the economy, exacerbated by fears of Covid-19, could diminish the benefits of a lower OPR.
Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz (pic below)said, “Malaysia’s economic recovery is also subject to the collective effort of all parties including corporates, SMEs, businesses and consumers, particularly in ensuring that the rakyat’s lives and livelihoods are protected and the economy is strengthened.
“In the past, Malaysia had demonstrated its resilience in managing various challenges, including the Asian Financial Crisis and the Global Financial Crisis, due to its sound economic fundamentals and robust institutional framework, as well as deep and well-regulated financial and capital markets.”
Speaking with StarBiz, MIDF Research senior analyst Imran Yassin Md Yusof said that it was highly unlikely for the banking sector’s new loan applications to improve sharply, even with the OPR cut.
“Businesses are still cautious and households are impacted by the higher unemployment or pay cuts post-Covid-19 outbreak, ” he said.
However, he pointed out that the reduced OPR may potentially spark another round of rally in the equities universe.
“With more liquidity in the market, you can expect a rally. But, it will be only for a short term, ” he said.
In its latest MPC statement, Bank Negara said economic activities had begun to recover from the trough in the second quarter, following the gradual and progressive re-opening of the economy since early May.
“The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook, ” it said.
Most economists had expected a cut in the OPR by 25bps to 1.75% at the latest MPC meeting.
According to 14 of the 25 economists surveyed by Bloomberg, they had expected a 25-bps cut. Four predicted a 50-bps reduction and the rest expected no change.
With the 25-bps reduction in the OPR yesterday, Bank Negara has cut it by 125bps over the past four meetings.
Judging from the MPC statement, Bank Islam chief economist Mohd Afzanizam Abdul Rashid believes that Bank Negara remains guarded as to what the future may hold.
He said the downside risks are still prevalent with the intermittent rise in the number of new infection cases in the developed countries, especially in the United States.
“The key message from the MPC is that Bank Negara is willing to go the extra mile in terms of monetary policy accommodation.
“In that sense, there is always a chance the OPR might be cut further but it will be highly data-dependent, ” he told StarBiz.
The fact that inflationary pressures are expected to be muted in 2020 provides ample room for Bank Negara to lower its rate further, if necessary.
“Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices, ” according to the central bank.
While a reduction in the OPR is generally positive for businesses, it is a key concern for the financial institutions that will need to lower their lending rates in line with the OPR cut.
Banks make a profit through the difference between the interest income generated by banks and the interest paid out to depositors.
This is referred to as the net interest margin (NIM), and a compression in NIM would affect the banks’ profitability.
However, MIDF Research’s Imran said the latest OPR cut will have minimal impact on the banks.
“The latest move by Bank Negara to cut the OPR was pretty much anticipated. I would think that the banks have adjusted lending rates and deposit rates accordingly so as to minimise the impact on the NIM due to the OPR cut.
“In addition, we also do not see much demand for fixed deposits and this would help banks in containing their cost of funds, ” he said.
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