How will the OPR cut impact your finances?

By Chee Jo-Ey

BANK Negara Malaysia (BNM) had reduced the Overnight Policy Rate (OPR) by 50 basis points to 2% on May 5. The ceiling and floor rates of the OPR corridor are correspondingly reduced to 2.25% and 1.75%, respectively.

Immediately after, Bernama reported that Maybank will reduce its Base Rate (BR) and Base Lending Rate (BLR) by 50 basis points which will take effect from May 8.

CIMB Bank also announced it will cut its BR and Fixed Deposit/Fixed Return Income Account-i Board Rates by 50 basis points on May 13.

Sunway University Business School economics Professor Dr Yeah Kim Leng said the objective of lowering the interest rate is simply to stimulate spending in a tough economic situation where consumer sentiment is weak and people and businesses tend to hold back more.

What an interest rate cut means for borrowers is lower debt servicing charges and monthly instalments for variable interest rate loans. 

“So, from a consumer’s perspective, a rate cut makes things easier on our pockets. On the flip side, however, it also translates into a decline in interest income for depositors. Typically, a lower rate will encourage those who are creditworthy to use more debt for spending or investments,” said Yeah.

A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change.

“With lower interest rates, individuals should look for higher yielding assets such as equities rather than fixed deposits but that comes with a downside of increased risks. Both consumers and businesses need to be mindful of credit risk and take a prudent approach in using debt to spend or invest, but if you have confidence that it will generate greater value over costs, now is opportune,” added Yeah.

According to Capspring Temasik financial adviser Wong Lee Kheng, the rate cut makes quite an impact for those who have huge loan amounts as they pay less interest. “If you have an emergency fund ready, keeping the same amount of instalment will result in a shorter repayment term. Check with the bank if it will speed up your repayment. It would be good to have a leg up and borrowers are able to repay the loan earlier,” said Wong.

Now is also the time to look carefully at your investment portfolios because interest generating power for fixed deposits is weakening due to the interest rate cut. “Review your portfolio and see if there are alternatives that provide better returns. The OPR changes sometimes and usually it is affected by the external factors. The global OPR has dropped to nearly 0%. For me, there’s no need to make big adjustments to your financial decisions around the OPR cut unless it is something you took into consideration prior to this. 

“Even if the OPR cut might make property investment more appealing, you have to do your homework and look at the value it creates against costs. The OPR cut is only an advantage if it has been part of the equation in your plan to buy a property or car from before the cut, otherwise you need to do your own research and speak to loan advisors to know more before jumping in,” added Wong. – May 8, 2020

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