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PETALING JAYA: As widely expected, Bank Negara has reduced the overnight interest rate (OPR) by 50 basis points (bps), bringing the benchmark interest rate to 2% to support the decaying economy of Malaysia.
With the cut in the OPR, commercial banks have followed suit with a corresponding adjustment in their interest rates and deposit rates.
The central bank move came a day after almost all economic sectors in the country were allowed to open, as the government further eased the movement control order (MCO) that had cost the country an estimated total RM63bil to date.
This is Banco Negara’s third rate cut for 2020, and represents the largest reduction in OPR since early 2009 at the height of the global financial crisis.
In total, the central bank has so far reduced the OPR by 100 bp.
The last time the OPR was cut in early March was 25 bp, after a previous cut of 25 bp in January, due to weakening growth prospects.
Moderate inflationary pressures had left room for Bank Negara to cut rates.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid (pictured below) said the highly accommodative policy of the central bank was justified due to the severity of the economic consequences of the Covid-19 pandemic.
“The latest decision by Banco Negara to reduce the OPR by 50 bp at once was expected, and it made sense due to the severity of the Covid-19 impact. The companies had to close during the MCO, which resulted in loss of revenue and revenue, ”Afzanizam told StarBiz.
Globally, he noted, major economies had seen their gross domestic product (GDP) contract during the first quarter. For example, the GDP of the United States and China had decreased by 4.8% and 6.8%, respectively.
“The supply and demand shocks occurred at the same time; therefore, it guarantees that monetary policy is very accommodative, ”said Afzanizam.
On whether there will be more rate cuts by Banco Negara in the coming months, Afzanizam said this would be subject to the evolution of the economic outlook.
“So far, the inflation rate is expected to be very low and therefore the space for new political accommodation is open,” he said.
For now, he expects the OPR to remain at 2%, but he calculated that the situation remained very smooth.
Meanwhile, Maybank fixed income research chief Kim Eng, Winson Phoon, said he expects the OPR to remain at 2% through the end of the year. He said improving economic data by 2021 would likely cause the central bank to stand still.
By contrast, Standard Chartered Global Research (StanChart) said Bank Negara was not yet done with the OPR cut.
The financial group said the central bank would likely cut the OPR again in July. This time, the cut would be 25 bp to reduce the OPR to 1.75%, lower than the 2% reached during the 2008/09 Global Financial Crisis.
StanChart, which expected the OPR to drop by 50bp yesterday, said the rate cuts were effective in supporting Malaysia’s economy, given its relatively high family leverage.
For example, he said, a 50bp cut in the mortgage rate could help households save about 0.4% of GDP per year. Such savings, in turn, could help support private consumption.
Similarly, MIDF Research also expects a further rate cut this year.
“Given that US interest rates remain at 0% -0.25%, we believe Bank Negara has a wide margin to participate with another 25 bps cut. Also, a low inflationary environment would support the Bank’s decision Deny, “the broker said yesterday.
“Expansive policies, both monetary and fiscal, will provide some buffer to the negative impacts of Covid-19 on the Malaysian economy,” he added.
Explaining the rationale for the latest OPR cut, Bank Negara noted that global and national economic conditions had weakened significantly, as measures to contain the Covid-19 pandemic had disrupted economic activities.
He said the decision to reduce the OPR by a total of 100 basis points to date would complement his other monetary and financial measures, as well as the government’s fiscal stimulus measures this year.
Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity, “Bank Negara said in a statement.
OCBC Bank economist Wellian Wiranto noted that in the context of highly uncertain growth, it was helpful for Banco Negara’s statement to hint at more room to lower the rate if necessary.
“As Bank Negara stated, the prospects for the future continue with a high degree of uncertainty. Therefore, it could cut further if the pace of recovery, in the national economy, but also, given Malaysia’s global export-oriented sector, the world, falters even after several blockades are lifted, “he said.
“Our benchmark expectation is to see the fund’s growth over the next month or so, so that we can more specifically say that there will be a significant rebound in the third quarter. In this scenario, Bank Negara will feel comfortable enough with what it has done so far to keep rates unchanged at its next monetary policy meeting in July. “
In general, lower interest rates are expected to weigh on banks’ earnings.
However, in a move seen favorable to banks, the central bank announced yesterday that, beginning May 16, banks could count their holdings of government bonds to meet their legal reserve requirement at the current ratio of 2 %. The measure is said to last until the end of May 2021.
Wellian said the move could provide a liquidity boost to the banking system and help ease the burden on banks. The measure would also increase the final demand for government bonds.
Last month, Bank Negara projected Malaysia’s GDP this year to be in the range of a contraction of up to 2% or growth of 0.5%. The projection was based on the assumption that the MCO would end on April 14.
However, the MCO has been extended three times, each for two weeks, since March 18.
Malaysia is currently in its fourth phase of the MCO, which is expected to end on May 12.
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