Kuala Lumpur, July 12–Low interest rates coupled with the fiscal stimulus will help cushion the severe shock stemming from the shutdown of economic activities due to the Covid-19 pandemic and its after-effects, said economists.
Their outlook stems from Bank Negara Malaysia’s (BNM) new reduction in the overnight policy rate (OPR) by further 25 points to 1.75% which is the lowest since the floor was set in 2004.
“The low interest rate environment synchronised with the fiscal stimulus will enable the economy to withstand the severe shock from the Covid-19 shutdown of activities in the second quarter and its after-effects in the following two quarters,” Sunway University Business School Professor of Economics, Yeah Kim Leng told The Malaysian Insight.
He said the latest reduction to below past crises’ level also indicated the need for further monetary support to shore up the flagging economy under severe strains from the Covid-19 pandemic.
The lower interest rate will also mean that consumers and businesses will be buoyed with lower debt servicing burden and borrowers will be able to access cheaper bank credit.
Although banks will experience further squeeze on their interest margins, depositors will bear the brunt from lower interest income, said Yeah.
He said although lower interest rates will weaken the currency, the ringgit should see some support from the strengthening of commodity prices and exports and if the economy recovers earlier than other virus-hit countries.
Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar, meanwhile, said the government had little choice but to further cut the OPR rates as it had limited fiscal avenues.
Although the lower interest rates might not spur investments, it will help companies service their interest payments, he added.
“At best, some companies will not go under because of the low interest rates. This will compensate for the thin margins that the banking sector will be able to earn,” he said.
“Since Malaysia has done a pretty good job of handling the Covid-19 fallout, I would expect an inflow of funds because since March 19, the Kuala Lumpur Composite Index has been moving upwards and that trend is likely to continue.
“Confidence in the (stock) market may override the pessimism that normally would come with a rate cut,” Nambiar added.
Kenanga Research said in a note on July 8 that the central bank’s dovish tone on a broad-based slump in the labour market and hampered confidence level, indicated that it may embark on another 25 basis points cut, in the next Monetary Policy Committee meeting slated to take place on September 10.
If this happens, the OPR will be brought down to a fresh record low of 1.5%.
Similarly, AmBank Research and OCBC Treasury Research economist Wellian Wiranto also said there is a possibility for further rate cuts, especially with the potential for the virus resurgence in dealing with the global economy, another severe blow.
“BNM’s resolute dovishness to continue doing what it can to limit what Malaysia has to suffer through because of that – 1.75% where OPR is going to be now may not be the lowest historically for long,” Wiranto said.
“Indeed, we now see a good chance that BNM may have to bring the OPR down yet again to 1.5% in the next meeting in September.
“Perhaps two months from now, the renewed anxiety about the virus would prove to be unfounded and BNM may be comfortable holding again. We frankly, do not know. But it would not be a bad thing if that turns out to be the case and we are wrong,” he added.
Adding that the rate cut was within its expectation, AmBank Research said in a note on July 8 that the uncertainties that lie ahead opens the door for further rate cuts.
AmBank Research said the economic performance of the second quarter of 2020 is expected to be the worst due to the movement control order and concurrent lockdowns to contain the coronavirus in other parts of the world.
It added that the outlook for the second half of the year also remains challenging despite the easing of lockdowns and the MCO.
“With political noises and trade war still very much in the cards, uncertainties remain. The risk of a second wave of virus infections cannot be ruled out. Also, it remains unclear if Covid-19 will be contained or will there be another round of lockdown.
“The focus will also be on October 1 when the six-month moratorium on loan repayment ends. Will there be an extension or will it be a targeted measure?” it said.
The central bank said on July 7 that the reduction in the OPR will provide additional policy stimulus to accelerate economic recovery.