BNM cuts OPR to record 1.75%

OCBC Bank expects BNM to cut the rate to 1.5% in September if the virus resurges and further impacts the global economy


THE cost of borrowing got a little cheaper as Bank Negara Malaysia (BNM) slashed the Overnight Policy Rate (OPR) for the fourth time this year due to concerns over weak economic conditions inflicted by the Covid-19 pandemic.

The OPR was cut by 25 basis points (bps) to 1.75%, the lowest ever on Bloomberg’s records dating back to 2004, while the ceiling and floor rates of the OPR were also reduced to 2% and 1.5% respectively at the Monetary Policy Committee (MPC) meeting yesterday.

The central bank had reduced the OPR by 100bps from January to May this year as concerns grew over a sharp slowdown in the second quarter (2Q).

“The reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery,” BNM stated in a statement yesterday.

In total, the central bank has slashed 125bps this year as preemptive measures to mitigate the impact of the outbreak, which has dragged the domestic and global economy following movement restrictions and lockdowns enforced in the country and worldwide.

Although major economies have eased measures to contain the virus, which has led to a gradual resumption of economic activities, BNM said downside risks to the global outlook remain, especially with a resurgence of the pandemic which may lead to the reintroduction of measures to contain the virus.

“The impact of Covid-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year.

“Although a trough is expected in the 2Q, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward.”

Malaysia was put under a Movement Control Order (MCO) beginning March 18 to curb the spread of the virus. The government started easing restrictions on May 4 and has reopened some parts of the economy allowing for a gradual recovery.

The central bank noted the fiscal and monetary stimulus measures rolled out by the government will also continue to underpin the improving economic outlook.

“The projected improvement in the domestic economy is expected to be further supported by a gradual recovery in global growth conditions.

“The pace and strength of the recovery, however, remain subject to downside risks emanating from both domestic and external factors.”

BNM said inflationary pressures are expected to be muted this year and the average headline inflation will potentially be negative, reflecting lower energy product prices.

“The MPC will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth.”

The cut in the benchmark rate has been rapid with a 25bps reduction in January and another 25bps in March. This was followed by a 50bps cut in May, which pushed the OPR rate to 2%, the lowest level since January 2010.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the rate cut reflected BNM’s stance in remaining guarded due to the uncertainty caused by the pandemic.

“The key message from the MPC is that the BNM is willing to go the extra mile in terms of monetary policy accommodation. There is always a chance the OPR might be cut further, but will be highly data dependent,” he told The Malaysian Reserve.

He said the move by BNM yesterday would improve disposable incomes of consumers with financing facilities with a variable rate as their monthly instalment will be reduced. Individuals can also opt to refinance as the borrowing cost is lower.

“Overtime, this would help support the economy and facilitate the recovery process.”

In a research note yesterday, OCBC Bank (M) Bhd economist Wellian Wiranto expects the central bank to cut the rate again to 1.5% in September if the virus resurges and further impacts the global economy.

“Given the resolute dovishness and newly uncertain outlook in the second half due to virus resurgence fears, the bar for another cut later this year has gotten lower than before. 1.75% may not be a historic low for long, since September may invite another cut, especially if global conditions suffer a relapse,” he said in a note yesterday.

Following the announcement, Malayan Banking Bhd announced a reduction of its base rate and base lending rate by 25bps effective tomorrow.

The cut in the policy rate saw the benchmark FTSE Bursa Malaysia KLCI closing 0.65% or 10.18 points lower at 1,566.72 yesterday, while the ringgit closed unchanged at 4.274 against the US dollar.