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KUALA LUMPUR (April 30): Bank Negara Malaysia is unlikely to lower the overnight interest rate (OPR) at the monetary policy committee meeting next Tuesday.
However, the central bank may further reduce the ratio of the legal reserve requirement (SRR) to 2% today, according to OCBC Bank economist Wellian Wiranto.
In a report released today, Wiranto explained that given the six-month loan moratorium, the economic agency is simply not ready to absorb another rate cut now after the 25 basis point cut on March 3.
“Since most borrowers don’t need to pay off their loans, the lower interest rates mean very little,” he added.
While Wiranto is not convinced that the time is good to cut the OPR at the next MPC meeting, he said he does not rule out another cut in the SRR relationship.
On March 19, BNM had reduced the SRR by 100 bp to free up RM30 billion of liquidity from the banking sector, and followed suit with an announcement of a six-month loan moratorium on March 24, 2020.
During the global financial crisis, the Central Bank reduced the SRR by 250 bp to 1% in March 2009, this was three months after a cut from 50 bp to 3.5% in December 2008.
“To better ensure eventual recovery, the continued health of the banking sector, which is the worst part of the cost of the moratorium, is also crucial,” Wiranto wrote in the research note.
With the loan moratorium in place, households and small and medium-sized enterprises (SMEs), which account for more than 75% of the banking sector’s loan portfolio, are automatically deferred from servicing their loans, he said, adding that for For large corporations, any postponement will depend on their negotiations with the banks.
“Since the vast majority of borrowers do not need to repay their loans at all, the lower interest rates during the period would carry very little boost in terms of actual transmission and would also bring a moderate boost to sentiment,” Wiranto said.
Banks now face the specter of a possible recovery in delinquent loans, as well as the absence of revenue streams from loan services during the six-month moratorium. Therefore, if the rate were reduced now, this could generate a more compressed interest margin for banks, adding another layer of challenges for banks, Wiranto said.
“While the scale of the slowdown and the space it has may still force you to cut the rate right away rather than waiting for the second half of the year, we think overall you would choose to wait to help ensure the sector’s sustained health bank, “he added.
He noted that the potential consequence of another rate cut is that the ringgit’s trajectory could be further affected by the narrowing of yield spreads, as the local currency “remains inadvertently tied in investors’ minds to the (bad) oil fortune. “
Furthermore, Malaysia is a net exporter of oil, the ringgit has had a relatively high correlation with the price of crude, and that is not a good thing when oil has been operating in the crisis, Wiranto said.
The government extended the MCO a third time to May 12, and Wiranto expects a further contraction of the Gross Domestic Product (GDP) by 1.5% by 2020, compared to its previous forecast of a contraction of 0.5% of GDP.
While the government has allowed essential services to now operate at 100% capacity during the MCO period, it believed that a “smooth reopening” of segments of the economy should help cushion the blow to some extent.
