*Source: Fair Observer
I. Bank Negara Malaysia reduces Overnight Policy Rate (OPR) to 2.75 percent
- 25 basis point reduction (second time in less than 6 months) brings Malaysia’s lending reference rate to its lowest since 2011.
- According to the Monetary Policy Statement released by Bank Negara, this reduction is “a pre-emptive measure to secure the improving growth trajectory amid price stability.”
- Latest Indicators in the Malaysian Economy include:
- Growth in 2020 expected to gradually improve, with continued support from household spending and better export performance.
- Headline inflation in 2020 expected to average higher than 0.7% in 2019 but remain modest.
- Underlying inflation expected to remain broadly stable, reflecting continued expansion in economic activity and absence of strong demand pressures.
- Overall investment activity expected to record a modest recovery.
- Downside risks remain including uncertainty from various trade negotiations, weaker-than-expected growth of major trade partners, heightened volatility in financial markets and weakness in commodity-related sectors domestically.
Source: Bank Negara Malaysia
 OPR is the interest rate at which a bank lends to another bank, used for monetary policy direction and has an effect on the country’s economic growth, inflation and employment.
Bait Al-Amanah Economic Analysis
Impact of Reduction in Overnight Policy Rate:
- Lower Base Lending Rate (BLR) and Base Financing Rate (BFR) resulting in lower cost for Malaysian consumers to borrow, indicating lower repayment amount over the same loan period, or the same repayment over a shorter period. This may increase accumulation of personal and household debts. Also, consumer spending power will increase.
- Businesses especially in the discretionary goods, property and construction sectors will fare better due to lower borrowing costs and higher domestic consumer spending.
- Boost for Equity Markets with lower borrowing costs.
- Decrease in fixed deposit interests and saving account interests reduces earnings from savings (especially for deposits that have not been locked-in prior). To ensure optimal returns, consumers and industry players should reassess savings and investment strategy.
- Currency will weaken due to lower yield and capital outflow. Weaker Ringgit results in increased competitiveness in Malaysian exports, which then raises output and spurs employment opportunities. However, importers will incur higher costs which may stifle the growth of output.
- The reduction in OPR would impact the net interest margins of banks resulting in a drop in the shares of banks, dragging the FBM KLCI into the red.
II. Malaysia’s Trade Performance in 2019 (Source: MATRADE on 4th February 2020)
- Malaysia’s trade surplus in 2019 continued to register double-digit growth for 3 consecutive years, widening by 11% to RM137.39 billion compared to RM123.78 billion in 2018 (largest trade surplus since 2009).
- However, total total trade contracted by 2.5% to RM1.835 trillion due to multiple external headwinds including rising trade protectionism, unfavourable external economic conditions, downturn in global semiconducter cycle, lacklustre global manufacturing and lower global commodity prices.
- Exports decreased marginally by 1.7% to RM986.4 billion in 2019 from the preceding year while imports declined by 3.5% to RM849.01 billion.
- Diversification strategy resulted in growing exports to other emerging markets in all regions.
For the PDF version of the full update (including the impact of Wuhan Coronavirus on the Malaysia, China and hte Global Economy) , refer to the attachment below: