BNM'S consecutive OPR cut due to intensifying global, domestic challenges

Bank Negara Malaysia’s (BNM) consecutive Overnight Policy Rate (OPR) cuts are mainly due to intensifying challenges on both global and domestic fronts following the Covid-19 crisis, said MIDF Research.

BNM today announced an OPR cut of 50 basis points (bps), bringing it down to 2.00 percent - the third cut so far this year.

MIDF Research said global uncertainties over the pandemic, protectionism threats and volatility in commodity prices remain, and are expected to affect the trajectory of Malaysia’s external trade performance.

“Hence, we believe expansionary monetary policy will provide support to the domestic economy via private consumption and investment,” it said in a research note today.

The research firm said it sees more downside risks to the economy, adding that Malaysia’s economic performance this year will be largely influenced by the Covid-19 outbreak, along with other factors such as the rising protectionism, global financial stability and the oil price war.

Private consumption, investment and external trade will be negatively impacted by the pandemic, nevertheless, utilisation of both fiscal and monetary policies will cushion some of the pandemic’s adverse impacts on the economy, it said.

MIDF Research said it expects one more rate cut this year.

“Our initial estimate was for OPR to hit the 2 percent level with two cuts; 25 bps each in 2020. However, based on the latest 50 bps cut, we are looking at another 25 bps cut for this year,” it said.

Meanwhile, OCBC Bank in an earlier report stated that although the need to ease the pain from the pandemic’s economic impact is high, BNM might not want to prescribe an interest rate cut as a painkiller just yet, due to potential side effects.

However, it noted that BNM had opted for a rather heavy dose of 50 bps rate cut today in line with consensus expectations, as it turns out that the economic pain is simply too great.

BNM also announced that effective May 16, banks can now fully meet their Statutory Reserve Requirement (SRR) with an existing ratio of 2 percent by holding government bonds such as MGS and MGII.

The measure is said to be effective until end-May 2021.

On this, OCBC Bank said BNM’s move is like killing a few birds with one stone, as the move provides a liquidity boost to the banking system, releasing an estimated RM16 billion worth of liquidity.

By doing so, it said, BNM has inadvertently helped to ease the burden on banks, as banks are bearing the brunt of the loans moratorium through deferred loans payment, and facing the spectre of rising non-performing loans due to poor growth outlook.

With the rate cut today, the research house said banks’ net interest margins (NIMs) will be further compressed, hence, the move might well be seen as somewhat of a consolation prize to the banks.

The move would also boost the end-demand for government bonds, it said.

“At a time of potential increase in issuance due to fiscal deficit needs, finding new demand for the bonds cannot hurt, and in this case, banks are incentivised to be the net new marginal buyers,” it added.

- Bernama