Bank Negara Malaysia (BNM) announced a further reduction in the overnight overnight rate (OPR) by 25 basis points to 1.75% on July 7, 2020.
This is the fourth time that the OPR has declined this year, pushing it to a record level.
What is OPR?
The OPR is the interest rate at which a bank lends to another bank, which is set by BNM. This rate has an effect on employment, economic growth and inflation in the country. It is an indicator of the health of the whole economy and the banking system of a country.
Why did BNM reduce the OPR?
The PTR has been reduced to help the economy recover from the impact of the COVID-19 pandemic.
“The impact of COVID-19 on the world economy is serious. Global economic conditions remain weak and global growth is expected to be negative for the year, “said BNM in a statement released today.
“Several large economies have started to relax measures to contain the COVID-19 pandemic, leading to a gradual recovery in economic activity,” said BNM, noting that financial conditions have improved. “Fiscal stimulus plans, in addition to monetary and financial measures, will continue to support the improvement in the economic outlook.”
However, the pace of economic recovery is subject to a few factors, including the possibility of new pandemic outbreaks, poor labor market conditions and global growth conditions.
“Average overall inflation should be negative this year, mainly reflecting the substantial drop in world oil prices,” added BNM.
How does this affect you?
So what does this mean for Malaysians?
With the 25 basis point reduction in borrowing rates, consumers will see an increase in their disposable income due to the reduction in interest payments. Consumers will have more money to spend, which will likely stimulate the national economy.
1. Lower interest rates on loans
Any change in the RPT will have an impact on loans that use the basic rate (BR) or the basic financing rate (WCR) to determine the interest rate by which it will lend to consumers.
If the OPR decreases by 0.25% and the banks decide to stick to their current profit margins, the BR of your loan will also decrease by 0.25%. This will reduce the interest rate on your loan.
For example, if your mortgage is tied to the BR, reducing the RPT will lower the mortgage interest rate, which means you will pay lower monthly payments. Here is an example of how it works:
|Amount of the loan|
|term of the loan|
|Mortgage interest rate|
(3.60% + 0.8%)
(2.55% + 0.8%)
|Total interest paid over 30 years|
Based on the example above, the reduction of 0.25% will result in a savings of RM 25,078 over a loan term of 30 years. Borrowers will see a RM69 reduction in their monthly repayment based on the example above. This means paying around 8% less in interest over the life of the loan.
2. Lower yields for savings accounts and fixed deposits
While a reduction in the OPR is good news for those who take out home loans, savers looking for more returns on their savings accounts and fixed deposits will be disappointed. The interest rates on these savings instruments will be reduced in parallel with the fall in the OPR.
However, this will not affect the fixed deposits that you have placed before the bank’s revision of the fixed deposit rates.
How does it affect the country?
While consumers may want cheaper borrowing costs, this means lower profit margins for banks. The current drop in OPR could affect short-term bank stocks.
However, lowering PBOs could be a positive measure for the economy.
“A drop in rates should give a positive boost to private consumption, which is the anchor for growth and investment, with exports completing in 2020,” said Dr. Anthony Dass, chief economist and responsible. research at AmBank at the start of the year.
Businesses could do better thanks to lower rates as borrowing costs and domestic spending increase.
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