Economists mixed on whether imminent rate cut will revive weak economy

by Ranjit Singh

BANK Negara Malaysia (BNM) is expected to cut interest rates again when its Monetary Policy Committee (MPC) meets on May 5. So far, the central bank has undertaken two interest cuts of 50 basis points (each) in the Overnight Policy Rate (OPR) in its meetings in January and March.

BNM had earlier projected that the country’s GDP is expected to come in between -2% and 0.5% for 2020. The economy, which registered a 4.3% growth for 2019, was already reeling from slow growth as we entered 2020. The 4Q19 GDP of 3.6% was the lowest in a decade.

Economists tell FocusM that a further policy cut of 50 bps, bringing the OPR to 2%, is a high possibility for the central bank in May as it tries to provide a catalyst to the economy which has suffered badly due to the Covid-19 pandemic.

In Malaysia, the pandemic has infected around 4,000 people and claimed 63 lives to date. As a measure to contain the outbreak, the government had imposed a Movement Control Order (MCO) from March 18 to April 14 and the MCO had crippled almost all business activities in Malaysia.

Lower interest rates mean that the cost of borrowing is cheaper and many argue it’s a suitable monetary policy tool to arrest weak economic growth. However, Professor Nazari Ismail of Universiti Malaya thinks otherwise, especially in these challenging times.

“I don’t think there will be much effect because sentiment is weak now. I don’t think BNM can do much now. Demand is weak in the economy,” he adds.

However, Dr Afzanizam Abdul Rashid, chief economist at Bank Islam Bhd, tells FocusM that the imminent rate cut would be positive for the economy. He opines that the central bank would not only cut the OPR but also the Statutory Reserve Requirement (SRR) to provide a catalyst to the ailing economy.

SRR is the statutory amount of funds that must be held by banks. So far BNM had cut the SRR by 150 bps to ensure that there is sufficient liquidity in the market.

“I think another round of OPR and SRR cuts could happen. It would complement measures which have been announced so far such as the loan moratorium, restructuring and rescheduling of financing.

“Lower OPR would mean lower cost of borrowings for borrowers. If they decide to refinance their existing borrowings, now is the best time to do so. Lower SRR would help to reduce the cost of funds for banks.

“So it may incentivise banks to grow their assets. Plus, we have seen that the SRR and OPR were cut to 2.% and 1.% during the Global Financial Crisis (GFC) in 2009. Since Covid-19 is likely to cause a global recession, additional monetary easings is well justified,” says Afzanizam.

Meanwhile, Nor Zahidi Alias, chief economist at Malaysian Rating Corporation Bhd, tells FocusM that reducing interest rates is the correct antidote to the lethargic economy.

“I think BNM is doing a fine job cushioning the Malaysian economic downturn. The reductions in the OPR are a relief for borrowers because it reduces the amount of interest payment obligations.

“Given the current economic situation – globally and domestically – I believe there is another rate cut on the horizon. However, I believe the monetary authority is also aware of the limitations of monetary policy and will be looking at all its options.

“With the recent reductions in SRR, which totalled 150 bps, there is ample liquidity in the banking sector. This would help if lenders can be incentivised to keep lending to viable businesses and individuals at times like this.

“For businesses especially, that would help them with their cash flow crunch, as well as support economic activity and therefore cushion against a sharp drop in growth,” says Nor Zahidi.

Perhaps BNM should also play a more prominent role in assisting businesses that are affected by the downturn in the economy to reschedule their repayments and restructure their loans to better reflect the current economic realities. – April 8, 2020

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