KUALA LUMPUR, 4 March 2020 – BANK Negara Malaysia (BNM) slashed its policy rates for the second time in three months to the lowest level in 10 years as Malaysia joins global economies in battling the fallout from Covid-19.
The Overnight Policy Rate (OPR) was slashed by 25 basis points (bps) to 2.5%, a level last seen in May 2010. Central bankers around the world are formulating financial countermeasures to address the coronavirus outbreak, which has already stuttered global growth.
The virus has spread to Europe and the US, while countries like South Korea and Japan are facing mounting cases.
The Reserve Bank of Australia yesterday slashed interest rates and pushed the borrowing rate to a new record low of just 0.5% on rising worries over the outbreak’s impact on the Australian economy.
US President Donald Trump praised Australia’s decision to slash lending rates and called for the US Federal Reserve to follow suit.
Reports suggested that Bank of England would be ready to act, while the Bank of Canada could slash the interest rate at its next meeting. The last time financial regulators around the world acted in an almost synchronised manner in a crisis was during the global financial meltdown of 2007-2008.
BNM said the downside risks to the “global growth outlook have increased”, particularly in the near term. Thus, the ceiling and floor rates of the OPR’s corridor are correspondingly reduced to 2.75% and 2.25% respectively.
“The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability.
“The Monetary Policy Committee will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation,” BNM said.
Malaysia’s largest bank Malayan Banking Bhd reduced its base rate (BR) and base lending rate (BLR) by 25bps effective tomorrow (March 5), following the central bank’s decision. Its BR will be lowered from 2.75% to 2.5.
The Covid-19 outbreak has disrupted production and travel activity — especially within the region — which has led to greater risk aversion, resulting in tighter financial conditions and a resurgence in financial market volatility.
BNM said growth, particularly in the first quarter of 2020 (1Q20), will be affected by the outbreak, primarily in the tourism-related and manufacturing sectors. The weakness in the agriculture sector is also likely to persist in the first three months.
The government had announced a RM20 billion stimulus package to cushion the impact on the economy.
The country recorded the biggest single day increase of coronavirus yesterday. Seven people were detected with the virus amid worries of a second wave of the outbreak, which could turn into a pandemic.
BNM said for 2020, private and public sector activities will be supportive of growth, while household spending is expected to grow at a slower pace amid moderate employment and income growth.
Investment activity is projected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors.
Institute for Democracy and Economic Affairs research manager in economics and business Lau Zheng Zhou said the second OPR cut would support the government’s fiscal effort.
“The coronavirus is disrupting the global supply chain, and a shock to the economy. Businesses will be suffering with falling inventories and getting money from consumers.
“BNM is doing it to signal confidence, telling the market and investors that we still have the space to provide stimulus, without which you can see investors making rash decisions in cutting their investments,” he told The Malaysian Reserve.
Lau said the government’s current focus is to boost growth in 1Q20. However, he said certainty and continuity in government’s policy is needed to sustain economic growth.
MIDF Amanah Investment Bank Bhd (MIDF Research) senior analyst Imran Yassin Yusof said the second cut is another pre-emptive move by BNM given the escalation of the Covid-19 outbreak
“The economy will be facing some headwinds, which the OPR cut is expected to help in moderating this impact. However, our economics team does not think that the economy is heading into recession.
“We believe that both the stimulus package and OPR cut will provide some reinforcement to the economy as it will provide some support to consumer spending. However, we should provide some time for the measures to take effect before any further action is needed.”
Imran Yassin said MIDF Research does not expect another rate cut this year.
Kenanga Investment Bank Bhd head of economic research Wan Suhaimie Wan Mohd Saidie said there is room for further cuts, depending on the severity of the Covid-19 impact on economy.
“How low can it go depends on how bleak the outlook is. However, the outlook is not in a recessionary mode yet. The lowest it went was 2% during the global financial crisis.”
First published in The Malaysian Reserve, 4 March 2020