Bank Negara Malaysia (BNM) has reduced the Overnight Policy Rate (OPR) by 25 basis points (bp) to 2.75%. What are the effects of these changes?

What is the OPR and the Latest Change?

The Overnight Policy Rate (OPR) is the overnight interest rate set by Bank Negara Malaysia (BNM). The rate can and does change over time, often as a tool used by central banks to shape the economic narrative. Reducing the OPR will reduce the cost of borrowing for banks and will lead to a chain effect affecting both companies and individuals. The recently announced rate cut surprised some economists who expected the rate to stay unchanged. It is however to note, only the 3rd rate cut for Malaysia in the last decade.

  • Reduced OPR: 2.75%
  • Change: 25 basis points
  • Announcement: January 22, 2020
  • Previous cuts: May 2019, July 2016
  • New ceiling rate: 3.00%
  • New floor rate: 2.50%

Official Monetary Policy Statement from BNM

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 2.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 3.00 percent and 2.50 percent, respectively.

The global economy continues to expand at a moderate pace. Latest indicators and the recent dissipation of trade tensions point to improving global trade activity. Monetary easing across major economies in the second half of 2019 has helped ease financial conditions, and is expected to continue to support economic activity. However, downside risks remain due to geopolitical tensions and policy uncertainties in a number of countries. This could cause a resurgence of financial market volatility and weigh on the global growth outlook.

For the Malaysian economy, latest indicators and supply disruptions in commodity-related sectors point to moderate expansion of economic activity in the fourth quarter. For 2019, growth will be within the projected range. For 2020, growth is expected to gradually improve, with continued support from household spending and better export performance. Overall investment activity is expected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors.

However, downside risks to growth remain. These include uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects.

Headline inflation averaged at 0.7% in 2019. In 2020, headline inflation is expected to average higher but remain modest. 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 remain broadly stable, reflecting the continued expansion in economic activity and the absence of strong demand pressures.

The adjustment to the OPR is a pre-emptive measure to secure the improving growth trajectory amid price stability. At this current level of the OPR, the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability.

OPR Cut Effect on Economy and Business

How is the OPR cut generally positive in impact for businesses and the economy?

  • Economy: The rate cut is with the intention to boost household spending and boost the overall Malaysian economy. There is an expected slight increase in inflation with the rate cut but expected to remain within range. Increases in oil and commodity prices, and the fuel ceiling cap removal will have a larger impact on inflation.
  • Business: Generally positive as most businesses will fare better with lower borrowing costs and increased domestic consumer spending. Sectors that may benefit include consumer goods, discretionary goods, property, construction, and exporters.
  • Banks: Reduced profitability with lower interest rates and thus profits reduced. The impact on banks net profit according to our calculations to be around -2% to -3%.
  • Importers: there may be a negative impact for importers whose base currency is in Ringgit if there is any impact from a further weakening Ringgit due to the rate cut as the cost of goods would increase.

OPR Cut Effect on Individuals

How does this affect the general Malaysian public?

  • Fixed Deposits: Lower returns for fixed deposits that have not been locked-in prior. If you have funds to place in a fixed deposit, you will want to do so before banks revise rates.
  • Equities: Generally a boost for equity markets as most companies perform better with lower borrowing costs (except the inverse for banks) and increased spending by consumers. The equities market is a leading indicator meaning that its effect will be seen faster than the economy.
  • Bonds: Generally fixed rate bonds will increase in value as bonds become more attractive when interest rates drop. In short, bonds have an inverse relation with interest rates meaning bond prices go up when rates go down (and vice versa). This affects long-term bonds more than short-term bonds as there is a longer coupon payment duration affected.
  • Property Loans: Variable rate loans including home mortgages interest rate will go down in tandem. Property loan repayments will reduce approximately RM10 monthly for every RM100,000 in loan amount. (Tip: check out our loan calculator).
  • Currency: Lower interest rates tend to be unattractive for foreign investment and decreases the currency’s value. However, the Ringgit has already weakened .

Overall

A rate cut was generally expected in 2020 but BNM has shown a willingness to move quickly as a preemptive measure. This is amidst a backdrop of geopolitical tensions, policy uncertainties, and financial volatility. We hope that this move will help boost economic growth which is expected to overall improve in 2020.

Share with us your views on the Overnight Policy Rate changes.