Bank Negara Malaysia in July announced the new OPR rate reduction to the lowest ever 1.75%. What does this mean for Malaysians and our economy?

Bank Negara Malaysia (BNM) announced the latest Overnight Policy Rate reduction by 25 basis points (bps) to 1.75% on July 7, 2020.

This is the 4th rate cut by BNM in 2020 and the lowest Overnight Policy Rate (OPR) in 16 years since 2004.

  • Jan 22: BNM cut OPR by 25bps to 2.75%
  • Mar 3: BNM cut OPT by 25bps  to 2.5%
  • May 5: BNM cut OPR by 50bps to 2.00%

What is OPR and why a rate cut?

Let us refresh our knowledge about the Overnight Policy Rate (OPR). OPR is the interest rate from banks which serves as a benchmark for lending and deposit rates charged by a lending bank to a borrower bank for borrowed funds.

OPR is an indicator for economic growth, inflation, risks and the economic situation in the country. The rate is adjusted to control the amount of money in circulation.

BNM’s move to cut the rate provides policy action to encourage the economic recovery because of the severe impact of Covid-19 pandemic to both Malaysia and the global economy.

“Several major economies have begun relaxing measures to contain the COVID-19 pandemic, leading to the gradual resumption of economic activity. The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook.” ~Bank Negara Malaysia (BNM)

BNM added that the pace of recovery is depending on a few factors like the possibility of another outbreak, poor employment market and global growth conditions.

“Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices.” ~BNM

How does this this impact Malaysians?

  1. The OPR rate determines borrowing rates by banks. When BNM announced rate cut, the Base Lending Rate (BLR) and Base Financing Rate (BFR) goes down. Since BNM introduced the usage of new reference rate framework in 2014, banks Base Rate (BR) is determined by the banks’ benchmark cost of funds and Statutory Reserve Requirement (SRR).
  2. For personal loans and car loans, the interest rate is fixed even though the OPR rate is reduced. However, the OPR rate cut will affect variable or flexi loans like property financing and ASB loan repayments. Do be aware that there are additional costs if you opt to refinance your loans.
  3. Savers will experienced lower returns for their savings accounts, fixed deposits and money market funds. This is as part of the move to stimulate the economy is to encourage spending. If you are a saver, you may be looking for alternatives to fixed deposits for saving. money in banks.

How does this impact Malaysia’s economy?

  1. A lower OPR rate means a lower profit margin for banks especially with variable rate loans being adjusted immediately while fixed deposits are locked in for the time period. This is further compounded with the total sum of variable rate loans being higher than the total size of fixed deposits at most banks.
  2. Certain sectors such as the automotive, property, REITs and consumer goods may benefit with consumers having more incentive to spend and lower borrowing costs. This overall will help increase private consumption.
  3. Other sectors which may benefit are REITs which may benefit from lower borrowing costs and export companies which benefit from a lower ringgit helping make Malaysian exports more competitive.

Overall

BNM is taking a move to help encourage economy recovery especially for consumer spending. However, the future still remains uncertain as a continued global economic contraction may still throw a damper on economic recovery in the short term. Globally, central banks around the world have been cutting rates with 144 rate cuts globally since March 2020 with Kazakhstan being the only exception to have raised rates. For savvy Malaysian investors, it may be an opportunity to take advantage of lower borrowing costs and additional cashflow to invest.

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Do you think the latest Overnight Policy Rate cuts will help spur the Malaysian economy?