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Malaysia: Weaker economy prompts rate cut

PETALING JAYA: Bank Negara Malaysia appears to have turned more cautious on the country’s economic outlook following its decision to slash the benchmark interest rate to the lowest level in nearly a decade.

The central bank’s Monetary Policy Committee announced the reduction of the Overnight Policy Rate (OPR) to 2.5% from 2.75% earlier.

The ceiling and floor rates of the corridor of the OPR were reduced to 2.75% and 2.25%, respectively.

The 25 basis points (bps) cut was in line with market prediction. A Bloomberg poll earlier showed that 15 out of 24 economists had forecast a 25bps rate cut.

However, MIDF Research described the timing of the rate cut as “a surprise”, as it had expected the central bank to let the recently-announced RM20bil economic stimulus package to have an effect first.

This is the second time Bank Negara has cut the OPR this year after a 25bps cut on Jan 22, bringing the cumulative rate cut of 50bps in the first quarter. The last time the OPR was adjusted to 2.5% was in May 2010, when the rate was increased by 25bps.

The central bank’s move to ease its monetary policy came less than a week after former Prime Minister Tun Dr Mahathir Mohamad announced the RM20bil economic stimulus package to prop up the slowing economy.

Bank Negara expected the economic growth, particularly in the first quarter, to be affected by the coronavirus (Covid-19) outbreak primarily in the tourism-related and manufacturing sectors.

It also said the weakness in the agriculture sector is likely to persist in the first quarter.

“Household spending is expected to grow at a slower pace amid moderate employment and income growth. Investment activity is projected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors.

“The 2020 economic stimulus package will also provide some support to economic activity.

“Although domestic growth is expected to gradually improve in the second half of the year, there are key downside risks, mainly stemming from the evolving nature and prolonged impact of the Covid-19 outbreak, and continued weakness in commodity-related sectors, ” Bank Negara said in a statement yesterday.

Commenting on the two rate cuts this year, Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that the 50bps reduction is believed to target existing borrowers, with the aim to ease cashflow.

“The lower OPR will translate into lower interest paid on loans with floating rates. This will help alleviate the burden of borrowers in their monthly loan repayments and free up some extra cash for consumption, ” he said.

When asked whether the OPR cuts would boost new loan applications, Lee said he was “not too sure about the outcome”, considering that sentiment remains subdued.

“With weak sentiment among households and businesses, it is hard to say how effective the lower OPR will boost demand for new loans, especially at a time when people are careful with their expenditure, ” he said.

Moving forward, economists were mixed on whether more rate cuts could be on the cards.

OCBC Bank economist Wellian Wiranto expected at least one more rate cut in 2020 – potentially in May – especially if the Covid-19 and political uncertainty concerns continue to weigh on growth.

“If the Federal Reserve cuts rate in the coming weeks, the odds of Bank Negara cutting rate for a third time this year would go up considerably as well, ” he said in a note yesterday.

Speaking to StarBiz, AmBank Group chief economist Anthony Dass also concurred that another 25bps cut could be introduced, should there be a need to support private expenditure and help ease pressure on non-performing loans.In addition, Dass also pointed out that Bank Negara has another ammunition to inject liquidity into the system – through the reduction of the Statutory Reserve Requirement (SRR) rate by 50bps.

“By freeing up 50bps, it would inject around RM8bil to RM9bil, which could be injected into the Special Investment Fund that can be used to aid small and medium enterprises, ” he said.

For context, SRR refers to the amount of money set aside by banks in their accounts maintained with Bank Negara for zero interest. A lower SRR would mean a lower amount to be set aside and this will reduce the banks’ cost of funds.

MIDF Research, on the other hand, expects Bank Negara not to opt for more rate cuts this year.

“We view one cut made last year and two cuts in 2020 are enough to support Malaysia’s economic growth especially via private consumption and investment.

“On top of easing monetary and expansionary fiscal policies, we opine the stable job market and low inflationary pressure would pave a steady upward trajectory for the economy, ” it said.

Bank Negara said that headline inflation is expected to average higher in 2020 but remain modest.

It pointed out that the trajectory of headline inflation will be dependent on global oil and commodity price developments and the timing of the lifting of the domestic retail fuel price ceilings.

“Underlying inflation is expected to be more moderate, amid limited demand pressures despite the continued expansion in economic activity, ” it said.

Source: https://www.thestar.com.my/business/business-news/2020/03/04/weaker-economy-prompts-rate-cut