Wednesday November 26, 2008

Market expects more interest rate cuts

By YAP LENG KUEN

PETALING JAYA: More rate cuts are expected following Monday’s move to reduce the overnight policy rate (OPR) by 25 basis points to 3.25%.

Bank Negara has the flexibility to cut rates further in view of the wide interest rate differentials in the ringgit’s favour, said Lee Kok Kwan, group treasurer, CIMB group.

‘‘I think it (the cut in OPR) is a good move as it will offset some of the effects of the global slowdown.

“Also, central banks in the western economies have reduced interest rates very significantly resulting in wider and wider interest rate differentials in the ringgit’s favour and this has given Bank Negara significant flexibility to reduce interest rates now,’’ he said.

The ringgit has been firm compared to other regional currencies, having strengthened against most western currencies with the exception of the US dollar.

Lee believes the cut in OPR, to which the base lending rate is tied, will have a positive impact on the productive sector, “making cost of funds, mortgages and car loans cheaper.’’

“More OPR cuts lie ahead,’’ said Pong Teng Siew, head of research at Jupiter Securities. “Bank Negara wants to make cost of funds cheaper and has come up with a surprise cut in the statutory reserve requirement (SRR), which represents interest-free deposits that banks place with the central bank.

“The message is to lend,’’ said Pong. “But will the banks bite? Central banks are doing the right things to stimulate the economies but getting the desired impact is another thing.

“In the current environment, that situation is not unique to any country. Bankers tend to turn cautious when the domestic oriented industries and export sectors are affected.

“Perhaps, setting a target loans growth, as has been done before, or using moral suasion may get the banks to lend more,’’ Pong said.

By lowering the OPR by just 25 basis points, Bank Negara is signalling that the situation is not as dire yet; it is just taking a pre-emptive measure in view of the deteriorating global environment which is placing all regional economies under pressure.

The cut in OPR will mean that banks earn less in interest but this can be offset, to a certain extent, by the cut in SRR which is projected to release RM2.7bil additional liquidity into the system.

Banks can take out some of the money parked in the SRR for lending or other high yielding purposes, thereby helping to improve their profitability.

“In view of the present credit concerns, banks are likely to use this to invest in high-yielding papers or Malaysian Government Securities,’’ said an analyst from AmBank fixed income research. “These rate cuts in OPR and SRR have been used by China and India and represent a trend towards the easing of monetary policy to boost economic activities.’’

For Bank Negara reports click here

News Poll

Latest Jobs from Star-Jobs

Latest from StarProperty