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Bank Negara Slashes Interest Rates By 50bp to Lowest Since 2010

Updated: Jun 16, 2020

Bank Negara Malaysia's Monetary Policy Committee (MPC) slashed interest rates by 50 basis points to 2% which is the lowest level since 2010 as the domestic economic conditions have been affected by the Covid-19 pandemic.

The announcement on Tuesday to reduce the Overnight Policy Rate (OPR) was within market expectations as the economy undergoes a contraction due to the Covid-19 pandemic that had had battered countries around the world.

With the latest decision, the OPR has been reduced by a total of 100 basis points, complementing other monetary and financial measures by Bank Negara as well as fiscal measures this year. Following the reduction in the OPR on Tuesday, the ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.25% and 1.75% respectively.

In its statement, Bank Negara said global economic conditions have weakened significantly. Measures to contain the Covid-19 pandemic have disrupted economic activity across most economies.

It said recent indicators show that the global economy is already contracting, with global growth projected to be negative for the year. Financial conditions have also tightened amid elevated risk aversion and uncertainty.

It also pointed out that substantial policy stimuli introduced by many economies, coupled with the gradual easing of containment measures globally, would partially mitigate the economic impact of COVID-19.

However, it expected growth prospects should improve in 2021 with the expected containment of the pandemic.

For Malaysia, domestic economic conditions have similarly been affected by the pandemic. Widespread containment measures globally, international border closures and the consequent weak external demand environment will exert a larger drag on domestic economic activity.

The Movement Control Order, while necessary to contain the spread of the virus, has also constrained production capacity and spending.

Labour market conditions are also expected to weaken considerably. Economic conditions would be particularly challenging in the first half of the year.

The fiscal stimulus measures, alongside monetary and financial measures will, however, offer some support to the economy, ” Bank Negara said.

It said as more businesses are allowed to operate under the Conditional Movement Control Order, it expected economic activity to gradually improve.

However, it was cautious about the outlook as growth continues to be subject to a high degree of uncertainty, particularly with respect to developments surrounding the pandemic.

On inflation, it said inflational pressures were expected to be muted in 2020, with average headline inflation likely to be negative this year, due mainly to projections for substantially lower global oil prices.

Nevertheless, the outlook remains significantly affected by global oil and commodity prices, as well as evolving demand conditions. Underlying inflation is expected to be subdued given the projections of weaker domestic growth prospects and labour market conditions, ” it said.

Bank Negara also said the financial sector was sound, with financial institutions operating with strong capital and liquidity buffers. Liquidity remains ample, augmented by liquidity injections by Bank Negara.

Since March 2020, Bank Negara has provided additional liquidity of approximately RM42bil into the domestic financial markets, via various tools including outright purchase of government securities, reverse repos and the reduction in Statutory Reserve Requirement. Bank Negara stands ready to provide liquidity in the interbank market to ensure orderly market conditions, conducive to support financial intermediation activity.

Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity. The MPC will continue to monitor the outlook for domestic growth and inflation. The Bank will utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery, ” it said.

Bloomberg's survey said it had expected the reduction of the OPR rate by a bigger-than-usual 50 basis points was to help cushion the economy just as the government begins relaxing restrictions put in place to contain the coronavirus pandemic, Bloomberg reported. At 2%, this was the lowest level since 2010, from 2.5%, according to 14 of 20 economists surveyed by Bloomberg.

Source: The Star

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