OPR — How low can you go?

“The OPR is now at its historical low and further cuts may not be effective in stimulating demand. There are other ways the government can stimulate demand and spur the economy, ” Dr Yeah Kim Leng, (pic) a professor of economics at the Sunway University Business School, told StarBiz.

PETALING JAYA: A further relief for existing borrowers but a lack of bullets in the future; or creating unhealthy imbalances in the economy? These are the considerations Bank Negara will have to make when its monetary policy committee (MPC) meets today to decide whether to cut the overnight policy rate (OPR) further.

Continued cuts to the OPR or interest rates may not yield the desired effect on the real economy, according to economists.

And this may be why the tide seems to be turning on the outlook of the OPR over the near to medium term.

Just about a month ago, most economists still believed that the central bank would continue to pursue another OPR cut to aid the economy but this has shifted, and a slim majority of economists polled on Bloomberg now believe that the central bank would keep the interest rate at 1.75% in its meeting today.

“The OPR is now at its historical low and further cuts may not be effective in stimulating demand. There are other ways the government can stimulate demand and spur the economy, ” Dr Yeah Kim Leng, a professor of economics at the Sunway University Business School, told StarBiz.

“Further cuts will help provide some relief to existing borrowers, but in terms of generating new credit flows (new borrowers), other considerations are more important rather than just credit costs alone, ” Yeah added.

He said it was noteworthy that the series of cuts have already achieved their aim to help support credit demand as the country is already showing some recovery.

“Further cuts may actually unnecessarily penalise depositors. The net effect may not yield the desired returns, ” he said.

The MPC will decide on interest rates and today’s meeting will be its fifth this year. The last meeting for the year is scheduled on Nov 3.

Socio-Economic Research Centre executive director Lee Heng Guie said he did not think a further cut to the OPR would be necessary and believes policymakers would look forward as economic figures in the second quarter are lagging indicators.

“There is some anecdotal evidence that sales are slowly coming back. Based on other economic data, I think the economy is now coming out from the worst of times and we cannot realistically expect an immediate rebound, ” Lee said.

The OPR is at its historical low of 1.75%, with a total of a 125-basis-point (bps) cut having been made thus far this year.

“There are greenshoots to the economy that the central bank can consider, as another cut in the OPR can be reserved for the future. Otherwise, they would have very limited space for the future. Bear in mind there are limitations to relying on just the OPR, ” Lee said.

He said other parts that could be considered to revive the economy would need to come from the fiscal side – such as tax incentives from the government.

Commenting on the low interest rate regime that is being done around the world, Yeah said interest rates that remained too low for too long could create unhealthy imbalances in the economy. In some countries like Japan and the US, interest rates are zero or near zero.

“Negative interest rates have proven to just be a temporary boost to the economy and do not really translate into real gains for the economy. It does boost the financial markets (temporarily) but there are other fundamental factors which are more important to sustain the economy too, ” Yeah said.

Lee said people have generally become immune to the low interest rates now and the central bank should reserve some “bullets” for future crises. “How much more can you stimulate with the rate being so low now? We should reserve some cushion for future economic shocks, ” Lee said.

In a report, UOB Global Economics and Markets Research said another cut to the OPR could not be ruled out despite a year-to-date cumulative 125-bps cut in the OPR to the historic low of 1.75%. UOB said this was due to official remarks on the pace of economic recovery and downside risks to economic growth.

Meanwhile, TA Research said there was a high possibility that Bank Negara would reduce the OPR by another 25bps in the upcoming monetary policy meeting. If that happens, it would reduce the OPR to an all-time low of 1.5%. “After that, we foresee the central bank taking a breather and leaving the policy rate unchanged for the remaining part of the year, ” TA Research said in its report.