Cheaper loans as Malaysia battles slowing economy

BNM slashes OPR to 2%, the lowest level since January 2010, as consumers expected to spend less due to pandemic concerns


NEW loans will be cheaper. Hire purchase rates for vehicles will drop. A borrower with a variable-rate loan could pay a few hundred ringgit less for a RM500,000 borrowing.

Even those with high fixed rate financing could be queuing at the banks to get the lowest rate in about 10 years.

Interest rates are falling in Malaysia at a time when the economy is crawling and consumer spending is expected to tank as worries over the prolonged impact of the coronavirus pandemic starts to seep through the psyche of the people.

Bank Negara Malaysia (BNM) did the obvious and as expected slashed the Overnight Policy Rate (OPR) by 50 basis points (bps), pushing the benchmark rate for banks to 2%, the lowest level since January 2010.

The ceiling and floor rates of the OPR were also reduced to 2.25% and 1.75% respectively, said the central bank in a press statement yesterday after its Monetary Policy Committee (MPC) meeting.

The central bank has slashed 100bps this year alone as worries over spiralling bad loans and the imminent recession would drag the country’s economy to the dark days during the global financial crisis (GFC).

“Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity.

“The MPC will continue to monitor the outlook for domestic growth and inflation. The bank will utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery,” BNM said in a statement.

The central bank sashed 25bps to 2.75% in January and another 25bps in March as a preemptive measure against the impact of the coronavirus outbreak, which has since put the world on lockdown.

In May last year, BNM slashed the overnight rate by 25bps to mitigate the effects of the long-running trade feud between the US and China.

The last time it cut the OPR by 50bps was on Feb 24, 2009, when the global economic outlook took a hit due to the GFC.

BNM said global economic conditions have weakened significantly and measures to contain the Covid-19 pandemic have affected economic activity worldwide.

“Substantial policy stimuli introduced by many economies, coupled with the gradual easing of containment measures globally, would partially mitigate the economic impact of Covid-19,” it said, adding that growth prospects should improve in 2021 as the pandemic is expected to be contained.

The central bank, however, retained the Statutory Reserve Requirement (SRR) ratio at 2%. BNM also announced yesterday that banking institutions can use Malaysian Government Securities (MGS) and Malaysian Government Investment Issue (MGII) to fully meet the SRR compliance, effective May 16 until May 31. It said the measure will release about RM16 billion worth of liquidity into the banking system.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Mohd Yusof said the cut was “largely anticipated” due to the potential economic impact of the Covid-19 pandemic.

For consumers, Imran said the move will reduce borrowing cost and make existing loans cheaper.

“In our opinion, the intended effect of the OPR cut is to ensure more disposable income for consumers and reduce cashflow pressure for businesses, and induce loan growth.

“With the lower borrowing cost, consumers will pay less for their loans, which will translate into more disposable income. It is hoped that this additional income will induce consumers to spend, which is an important factor to reignite the economy,” he told The Malaysian Reserve (TMR).

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said individuals who have variable rate financing would greatly benefit from the OPR cut as the rate will reset almost immediately.

“As for others, they could refinance their existing borrowings in order to lock in the new rates. That way, they would be able to enjoy (lower) instalment, assuming their previous financing rate was much higher than the prevailing rate,” he told TMR.

Mohd Afzanizam said the OPR cut was expected due to the severity of the impact caused by the pandemic, leading to closure of some businesses, as well as losses in revenue.

A further rate cut is subject to the changing economic outlook and there are rooms for further policy accommodation as inflation rate is expected to be low, he said.

“For now, we think OPR should stay where it is at least until the next meeting in July. Situations are very fluid. BNM will likely be vigilant and cognisance of its surroundings.”

In a research note yesterday, OCBC Bank (M) Bhd economist Wellian Wiranto said the “threshold” for a further rate cut is difficult to cross now, following BNM’s decision yesterday.

However, he said BNM may cut the OPR again if the recovery rate falters after lockdowns 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 3Q (third quarter).

“In this scenario, BNM will be comfortable enough with what it has done thus far to hold rate unchanged at its next MPC meeting in July. For the sake of us all, let’s hope that indeed turns out to be the case.”

RHB Investment Bank Bhd economist Ahmad Nazmi Idrus said the bank’s GDP forecast for 2020 is revised lower to -4% from 0% previously.

He said measures taken by BNM to support the economy, including the 6-month loan moratorium, are sufficient for the time being.

“However, as the risk of another wave of infection still remains, growth could likely remain weak for a longer time as consumers continue to be cautious about their spending habits.”