KUALA LUMPUR: Bank Negara Malaysia cut its Overnight Policy Rate (OPR) by 50 basis points (bps) to 2.00 per cent yesterday, as market consensus had expected, to ease the pain of the Covid-19 impact, economists said.
They believe Bank Negara might still have some space for more cuts this year, possibly as early as July.
The central bank announced the latest OPR cut after its Monetary Policy Meeting (MPC) yesterday.
Accordingly, the ceiling and floor rates of the corridor of the OPR were reduced to 2.25 per cent and 1.75 per cent respectively, Bank Negara said in a statement.
The OPR has so far this year been reduced by a total of 100 basis points, complementing other monetary and financial measures by Bank Negara as well as government fiscal measures during the year.
Bank Negara said the measures would cushion the economic impact on businesses and households from Covid-19 and support economic activities.
Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said the move was expected and made sense following the adverse impact of Covid-19.
“We could see businesses having to shut down due to the Movement Control Order (MCO). This has resulted in the loss of revenue and income,” Afzanizam told the New Straits Times (NST).
He said major economies such as the United States and China had seen their gross domestic product (GDP) fall by 4.8 per cent and 6.8 per cent in the first-quarter respectively.
“Hence, the supply and demand shock happened at the same time and therefore it warrants for the monetary policy to be highly accommodative,” he added.
He said with the inflation rate expected to be low, there was room for the monetary policy to be more accommodative.
“For now, we think the OPR should stay where it is at least until the next MPC meeting in July. Situations are very fluid. Bank Negara will likely be vigilant and cognisant of the surroundings,” he added.
AmBank Group chief economist Dr Anthony Dass expects a challenging first-half (1H) of 2020 with the worst likely to be in the second quarter following the MCO.
“With 1H growth expected to be in recession added with lack of inflation pressure, the 50bps rate cut is within our expectations.
“We expect the economy to improve moderately in the third quarter before a better performance in the fourth quarter supported by the government’s stimulus measures,” Dass said.
Juwai IQI chief economist Shan Saeed expects Bank Negar to continue pursuing stability in growth, inflation and financial markets.
“It will continue its accommodative monetary policy to support growth outlook for the remaining quarters,” Shan told the NST.
He noted that as of today, 31 global central banks had lowered their interest rate.
“We are heading for a lower interest rate regime because the global economy is slowing down and it needs accommodative monetary policy to keep macroeconomic stability. Accommodative monetary policy and expansionary fiscal policy can get the global economy out of deep recession,” he said.
Putra Business School business development manager Associate Professor Dr Ahmed Razman Abdul Latiff said the OPR move was part of the government’s continuous efforts to increase the banking sector’s liquidity.
“This is to ensure several economic indicators such as inflation and unemployment are contained, to ensure growth in productivity and GDP,” he said.
He added that a lower OPR means a lower base lending rate, which is now at around 6.15 per cent.
“This will encourage many individuals and businesses to take new loans and theoretically will spur spending and increase domestic trade transactions,” he said.
He added that the low OPR would make savings not attractive as depositors would get lower return on their savings.
“Hence, they will withdraw their savings and start to spend or invest in other investments that will give higher returns.
He cautioned Bank Negara about setting the OPR at a very low rate as this will create a liquidity trap.
“This happens when the borrowers and depositors decided to take up the loan or use their savings to invest in assets that do not provide additional employment or increase domestic trade transactions such as buying shares and also using the cash to settle other outstanding debts,” he said.