By Ranjit Singh
BANK Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) will convene tomorrow (May 5) to decide on the direction of the interest rates in the country. Currently, the Overnight Policy Rate (OPR) stands at 2.5%.
The central bank has so far reduced interest rates twice this year with a 25 basis point (bps) each time in January and March to help the ailing economy. Malaysia which had recorded a gross domestic product (GDP) of 4.3% in 2019 is expected to register growth of between -2% and 0.5% for 2020 amid the Covid-19 outbreak.
The outbreak had infected close to 6,000 people and claimed 105 lives thus far. It had disrupted supply and demand dynamics which resulted in a sharp downturn in the economy.
The government had introduced an Economic Stimulus Package (ESP) valued at RM260 bil to mitigate the economic impact of the pandemic on March 24. The pandemic had also caused many SMEs to go out of business and massive unemployment.
Economists told FocusM that BNM may reduce interest rates again to reboot the economy while some opined that the central bank might hold rates steady as it has already imposed a 6-month moratorium on bank borrowings for companies and individuals. Some argue that in the face of lethargic demand, reducing interest rates might not help the economy.
Lower interest rates normally stimulate borrowings and investments.
Dr Afzanizam Abdul Rashid, chief economist at Bank Islam Bhd, told FocusM that he expects the central bank to slash rates by 50 bps in its meeting tomorrow.
“For OPR, we expect a 50 basis points cut during the MPC meeting tomorrow. Lower borrowing costs would encourage businesses and households to take on new or refinancing their financing facilities. This would help improve their cashflows and along the way would promote investment and spending,” said Afzanizam.
When asked whether the loan moratorium would influence the central bank’s decision, he said the OPR decision would be a more broad-based approach towards resuscitating the economy.
“Yes. They would consider that too (the loan moratorium). However, the OPR decision would be more broad-based. Plus, the transmission to the economy would take a while. It’s not immediate. So more monetary stimulus would mean higher or improved growth in the future,” added Afzanizam.
However, an economist at MIDF, Mazlina Abdul Rahman, differed in her opinion. She thinks that BNM will maintain rates as it waits for the loan moratorium period to be over as there would be an ‘interest holiday’ for a six-month period.
“I think BNM will maintain the interest rates at 2.5% to give way for the impact of stimulus packages to come in. The package, which includes a loan moratorium, could give BNM more time to engage in further cuts.
“We foresee two more rate cuts of 25bsp each but likely towards the end of this year, in the last two meetings, in order to continue stimulating the economy,” said Mazlina.
If the central bank proceeds with a 50 bps interest rate cut, the OPR would be 2%, making it the lowest level since the Global Financial Crisis of 2008-2009.
Meanwhile, RHB Research maintained its growth projection at 0% for Malaysia this year, the brokerage saying that further revisions were possible, noting that risks to growth remained tilted to the downside.
“The major uncertainty is the possible prolonged and wider spread of Covid-19, as well as its sharper negative effect on the domestic and global economies.
Other downside risks include prolonged low commodity prices and supply shocks, as well as heightened financial market volatility,” it said.
“On the upside, the fiscal and monetary stimulus could spur a stronger-than-expected consumption recovery.” – May 4, 2020
