Bank Negara's rate cut to ease borrowing costs, back domestic demand: Economists
KUALA LUMPUR: Bank Negara Malaysia's move to lower the overnight policy rate (OPR) will ease borrowing costs and support domestic demand as the economy faces a slower growth outlook, economists said.
Bank Negara cut the overnight policy rate (OPR) by 25 basis points to 2.75 per cent, marking its first policy shift in over two years and aligning with market expectations.
The central bank had kept the benchmark rate at 3.00 per cent for 12 consecutive meetings since May 2023.
The decision was made during the central bank's fourth Monetary Policy Committee (MPC) meeting of the year.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the cut would help consumers by reducing financing costs.
This is particularly for loans with variable rates, while new borrowers could secure better deals.
"This can help improve disposable income. For new borrowers, I suppose they can get a better deal as they can search for financing rate that are highly competitive.
"For savers, the new deposits would be set at lower rate since the deposit rates also need to correspond with the changes in OPR," he told Business Times.
Afzanizam expects the move to be neutral to slightly positive in the ringgit and capital flow as it signals Bank Negara's proactive approach in managing growth risks.
"That goes to show that the Bank Negara is on top of the game which then can translate into confidence building.
"However, traders may also look at the interest rate differential with the US rate especially in the context that the Fed is not incline to cut the policy rate in the near term," he added.
Afzanizam said a rate cut sufficiently drive spending and investment to meet the central bank's inflation target without overheating the economy.
He said at OPR of 2.75 per cent, the real interest rate stands at 1.55 per cent which essentially still high by historical standard whereby long-term average of 0.88 per cent.
"This effectively means that borrowers are paying an expensive cost of borrowings in real terms. If left unattended, it might discourage domestic demand from growing at a healthy pace," he said.
Putra Business School Associate Professor Dr Ahmed Razman Abdul Latiff said lower rate will make borrowings more attractive to consumer and thus help to increase liquidity in the market, which will contribute to higher business activities.
He said the rate cut, in theory, will kickstart the economy as increased liquidity will led to higher business activities and thus positive growth for the gross domestic product.
"It will not affect ringgit and capital flow as much as this involves domestic economic activities," he said.
With a currently low inflation rate of 1.2 per cent, Razman said the revised OPR may push spending and investment in the country without driving the inflation rate too high.
He said such a low rate for inflation at the moment will give ample room for the central bank to monitor its movement upon the OPR rate cut.
While the lower rates may encourage consumer borrowing, economist Dr Geoffrey Williams warned of of the risk that households could take on more debt now only to face higher rates later if global monetary policy tightens again.
"There may be an uptick in consumer borrowing but there is also a danger that consumers will take on extra debt at lower interest rates only to find that interest rates rise quickly afterwards.
"Saving and fixed deposit rates will fall and these are already very low," he said.
Williams said the revised OPR is a modest rate cut that will provide some support given the expected slower growth in the second half of the year.
He added that the bigger focus now should be on sustaining growth into next year and beyond.
"The ringgit was steady today but the narrowed interest differential may weaken the ringgit in coming days and weeks.
"Capital inflows from the repatriation policy are continuing to support the ringgit," he added.
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