Bank Negara’s drastic OPR cut ‘good news’ for post-Covid recovery

Lower loan repayments as a result of a drop in BNM’s overnight policy rate will increase disposable incomes for individuals and businesses, say economists.

PETALING JAYA: An economist has welcomed Bank Negara’s slashing of the overnight policy rate (OPR) to its lowest level since 2010, saying it will help the economy recover because it supports consumption and investment spending.

Yeah Kim Leng of Sunway University said the reduction of the OPR by 50 basis points to 2% – the lowest in a decade – would ultimately increase the disposable incomes of corporate and individual borrowers.

OPR is the central bank’s policy rate used by banks to set interest rates for loans.

With lower OPR rates, borrowers of flexible interest rate loans will enjoy lower loan servicing payments once banks adjust their base lending rates. A number of banks have since adjusted their rates.

“If you took a personal five-year loan of RM50,000 at 7% interest, with the OPR cut you will be paying RM20 less in monthly instalments,” said Yeah.

“For a 30-year mortgage loan of RM300,000, the monthly instalment is reduced by about RM100 if the bank’s interest rate is reduced correspondingly from 4.5% to 4.0%.”

He said the OPR cut would result in a “substantial monetary surplus” that would put more money in the hands of consumers and firms through reduced interest payments.

Lower borrowing costs would encourage businesses and households, particularly those with good credit scores, to consider taking on new loans, he added.

He said the cut would cushion the fall in domestic spending due to Covid-19.

“Once there is greater clarity in how the Covid-19 situation will be managed and consumer and business confidence returns, this OPR cut will be important in giving the economy a kick start.”

Malaysian International Chamber of Commerce and Industry executive director Shaun Edward Cheah said lowering the OPR rate would relieve some pressure off some companies on their loan repayments.

He said it would support the government’s economic recovery plan, but added that more was needed.

“During the global financial crisis, interest rates went to zero and still some economies languished,” he noted.

“Hopefully, other monetary measures and fiscal stimuli will be introduced to tackle rising unemployment, lower consumption, and investments.”

Such measures, he said, could include an extension of Bank Negara’s moratorium on loan repayments to the end of 2021 and an extension of loan tenure periods without penalties.

Cheah urged the government to lay out its plan to drive economic growth at a time of low confidence in the global and local economies.

“At present, we are not seeing a strategic economic fiscal policy to drive demand inside and outside Malaysia,” he said.

“We need to know which industries will generate economic growth.” - FMT