Borrowers cheer as BNM cuts OPR to 2.75%, but banks slump

Banking stocks plummeted at the end of trading, dragging the FBM KLCI into negative territory

by SHAZNI ONG / pic by HUSSEIN SHAHARUDDIN

THE central bank unexpectedly slashed the overnight policy rate (OPR) by 25 basis points (bps) to the lowest level since 2011, as signs of slower growth from global turmoil hit the country but the cut brought a relief to borrowers.

Bank Negara Malaysia (BNM) reduced the policy rate, which is the reference point for lending, to 2.75% from 3%, the second cut in eight months as analysts expect a weak final quarter of 2019.

But borrowers cheered over the reduction, trimming their current financial commitment and boosting consumer spending.

Analysts had expected the financial regulator to leave the OPR unchanged and any reduction would come at the end of the first quarter (1Q).

BNM said the Monetary Policy Committee agreed to reduce the OPR to 2.75% from 3% as a pre-emptive measure to increase the growth trajectory amid price stability.

“For 2020, growth is expected to gradually improve, with continued support from household spending and better export performance,” BNM said in a statement yesterday.

The central bank highlighted the downside risks of geopolitical tensions and policy uncertainties in a number of countries, but monetary easing across major economies in the second half of last year helped ease financial conditions.

Socio-Economic Research Centre ED Lee Heng Guie said the rate cut reassured the public that the monetary policy would continue to remain supportive of growth.

“It also reckons there are many downside risks to the economy despite some positive, stabilisation in the global economy coming from the easing trade tension,” he told The Malaysian Reserve (TMR) yesterday.

Lee said the bond markets and some banking stocks reacted to the rate cut, but the winners would be the borrowers.

Most banking stocks slumped yesterday following the announcement. Rate cuts mean less interest income for lenders as banks struggle to achieve higher earnings.

Banking stocks plummeted at the end of trading, dragging the main FTSE Bursa Malaysia KLCI (FBM KLCI) into the negative territory.

“With this rate cut, together with last year’s 25bps, cumulatively we have 50bps. For those who wanted to borrow some money and for some business expansion for buying something, this is quite a big decision.

“For the existing borrowers, if they have the loans, and maybe they can go to the bank and adjust their repayment and fees, so that they can have some relief.

“But for the new borrowers, it all depends. Those that really have something that they wanted to do, such business, loans, now they can think about wanting to borrow, like for property,” he said.

Lee said with BNM’s support towards lowering the OPR, it is important for the government’s fiscal side to stimulate the economy, including not to delay projects.

“Do not waste time and do the right thing because the external environment is getting more complicated,” he said, adding that there were a lot of risks, including geopolitical tensions and non-economic risks like the flu scare in China.

Lee said the central bank had to trim the policy rate now as it anticipates a weaker GDP during the October through December 2019 period.

“Looking at 4Q last year as an indicator, it suggests the 4Q GDP was likely to be weaker than 3Q19,” he said.

United Overseas Bank (M) Bhd senior economist Julia Goh said BNM is expected to keep the OPR at the announced level and allow the effect to impact the economy.

“The rate cut helps extend the stimulus effect from the previous OPR cut in May 2019. The next key data to watch is 4Q19 and full-year 2019 GDP that will be released on Feb 12,” she said in a note.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the central bank is mindful of external developments and would be data-dependent in deciding their next course of action.

“We were surprised by the move as we are looking that BNM might want to cut the rate in May,” he told TMR, adding that it would boost growth trajectory.

Mohd Afzanizam said inflation is not really an issue as the government had postponed the targeted fuel subsidy indefinitely and reduction of PLUS toll rates would further contain inflation.

“At this juncture, we believe BNM would maintain the prevailing OPR throughout the year, subject to the evolving economic outlook globally. For now, 25bps should suffice to spur the economic activities,” he added.