AMBANK views the latest 50 basis points (bps) reduction in the Overnight Policy Rate (OPR) as justifiable as the economy is expected to be in contraction in the first half of 2020 (1H20) due to Covid-19 related impacts and the Movement Control Order (MCO).
It said with the recent cut, the cumulative interest rate reduction in 2020 thus far amounted to 100 bps and aimed at cushioning the downside risk on growth where a sharp contraction is expected in 1H20 resulting from the MCO.
“Nevertheless, with the fiscal stimulus measures, the easing of the MCO and the gradual improvement on the global front in the second half of this year (2H20) should see the economy slowly come out of the woods.
“Lower interest rates will potentially entice consumers to return to the market and purchase items like property and automobiles although the number of transactions may not be significant in the third quarter of this year but as the confidence level improves, pent-up demand is expected to pick up,” it said in a research note today.
AmBank said there are possibilities for more rate cuts depending on the transmission effects of the latest cut on the economy, how effective it is on spending and containing non-performing loans (NPLs) as well as supporting loan growth, especially after the moratorium period.
“Also, any decision on more cuts is possible if the downside risk on the economy remains high.
“Besides, the inflation outlook for 2020 remains weak, at between 0.3% and -1.5%, suggesting there is ample room for more rate cuts, if necessary,” it said.
Meanwhile, Ambank said the announcement by Bank Negara Malaysia (BNM) that Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) can be used by banking institutions to fully meet the Statutory Reserve Requirement (SRR) effective May 16, would help to ease liquidity issues given the uncertain environment.
“With the SRR ratio maintained at 2% it would release an additional RM16 bil in liquidity into the financial system.
“It also bodes well for the bond market as we expect more issuances to finance the fiscal stimulus, projected at RM145 bil,” it said.
AmBank said it should help banks as they shoulder the burden of the loan moratorium and face the potential risk of rising NPLs.
It added that with the rate cut, banks’ net interest margins (NIMs) would be further compressed, hence the 50 bps cut should see both NIMs and earnings impacted by 4-8 bps and 2-6%, respectively. — May 6, 2020, Bernama
