Overnight Policy Rate lowered to 3.25%

By LOONG TSE MIN

Rate reduction to affect mainly banking and consumer-related sectors

PETALING JAYA: Bank Negara has cut its benchmark Overnight Policy Rate (OPR) by 25 basis points to 3.25% from 3.50%, and signalled it was ready to cut the rate further.

This was the first rate cut in over five years. The move, which can be considered well-timed as the economy slows, will result in a lower cost of funds for banks. This, in turn, brings down the cost of borrowing for consumers.

To inject more liquidity into the banking system, Bank Negara also cut the statutory reserve requirement (SRR) for banking institutions for the first time in a decade - from 4% to 3.5% - effective Dec 1.

“Given the heightened downside risks to growth and the diminishing inflationary pressures, the reduction in OPR is a pre-emptive measure aimed at providing a more accommodative monetary environment,’’ Bank Negara said.

“To further reduce the cost of intermediation, the monetary policy committee also decided” to reduce the SRR, which is the amount of reserve capital that banking institutions place with the central bank, as a percentage of their deposits and other eligible liabilities.

“Bank Negara will monitor closely the evolving developments and will undertake the appropriate policy response to avoid a severe economic downturn.

“The global economic and international financial conditions are expected to continue to be volatile and uncertain,” it said.

Aseambankers’ chief economist, Suhaimi Illias, told StarBiz the sectors most affected by the rate cut would be banking and consumer-related sectors, such as auto and property.

Malaysian Automotive Association president Datuk Aishah Ahmad told StarBiz the rate cut would “definitely help the industry by lowering repayments from car buyers.”

Real Estate and Housing Developers’ Association Malaysia president Datuk Ng Seing Liong welcomed the OPR reduction but said the association had been hoping for an even steeper cut of 50 basis points.

CIMB Economic Research head Lee Heng Guie said Bank Negara’s rate cut showed policy makers were concerned about “potential downside to growth,” given volatile external forces as well as weakening domestic demand.

Lee has forecast another 25-basis point cut by the central bank within the first quarter of 2009, especially with “the diminishing threat of inflation going forward.”

The 50-basis point cut in the SRR to 3.5%, Lee noted, would inject liquidity into the banking system, lower the cost of funds and free up capital for lending.

The last time the SRR was cut was in the midst of the Asian financial crisis, on Sept 16, 1998 when it was reduced to 4% from 6%.