PETALING JAYA: Bank Negara Malaysia (BNM) today reduced the Overnight Policy Rate (OPR) by 50 basis points (bps) to 2%, the lowest since the global financial crisis (GFC), but there could be another revision of the benchmark interest rate on the horizon.
MIDF Research expects one more rate cut of 25bps this year, pushing the interest rate to 1.75%, lower than the level seen during GFC, reflecting the expectation of a worse economic conditions than the previous crisis.
“Since the US’s interest rate maintained at low 0-0.25% level, we believe BNM has ample room to engage with another 25bps cut. In addition, the low inflationary environment would be supportive to BNM’s decision. Expansionary policies in both monetary and fiscal will provide some buffer from the negative impact of Covid-19 on the Malaysian economy,“ it said.
It said today’s 50bps cut was the biggest in a decade and that the consecutive cuts (since January) were mainly due to intensifying challenges to both global and domestic front resulting from Covid-19.
BNM has reduced the OPR by a total of 100bps this year, complementing other monetary and financial measures as well as fiscal measures.
Based on the current developments and indicators, MIDF foresees the Malaysian economy falling into recession this year compared to a 4.3% year-on-year growth in 2019. Private consumption and investment along with external trade will be negatively impacted by the pandemic.
OCBC Treasury Research noted the 100bps cut makes the threshold to trim further obviously harder to cross now.
Still, the outlook ahead remains ridden with high degree of uncertainties. Hence, BNM might well cut further again if the pace of recovery falters even after various movement control orders (MCOs) are lifted.
“Our baseline expectation is to see growth bottoming out in the next month or so, such that we can more concretely say there is going to be a significant uptick in Q3. In this scenario, BNM will be comfortable enough with what it has done thus far to hold rate unchanged in its next meeting in July,” it said.
UOB Research also foresees no further cuts this year, given that the government has allowed a reopening of the economy, which will help to blunt the recessionary effect and pave the way for a recovery in the second half.
“We see the OPR cut as a reinforcement of the RM260 billion worth of fiscal measures and prior rate cuts to support the economy,” it stated.
In its statement today, BNM also said Malaysian government securities and Malaysian government investment issues can be used by banking institutions to fully meet the statutory reserve requirement (SRR) compliance effective May 16.
This flexibility is available until May 31, 2021 and will release RM16 billion worth of liquidity into the banking system. The SRR ratio remains unchanged at 2%.
“To us, the move kills a few birds with one stone. It provides a liquidity boost to the banking system, as banks do not have to hold ‘extra’ liquidity beyond their holdings of government bonds just to fulfil the SRR ratio requirement,“ said OCBC.
Secondly, it said BNM has inadvertently helped to ease the burden on banks. Banks are bearing the brunt of the loans moratorium through deferred loans payment, and face the spectre of rising non-performing loans due to poor growth outlook. With the rate cut today, their net interest margins will be further compressed as well.
Thirdly, the measure would also boost the end-demand for government bonds. OCBC said at a time of potential increase in issuance due to fiscal deficit needs, finding new demand for the bonds cannot hurt.
