For the third time in 2020, Bank Negara Malaysia (BNM) announced the reduction of the overnight policy rate (OPR) by 50 basis points to 2% on May 5, 2020. Chart below show the past 15 years OPR trend, it was back to the year 2009 when there is Subprime crisis in USA.
source: tradingeconomics.com
Why did BNM reduces the OPR?
Since The Movement Control Order started 18 March, the spending by consumer market has been greatly reduced. The economy is not moving, everybody is stay at home. BNM reduces the OPR in order to help cushion the economic impact of the COVID-19 pandemic.
Policymakers said economic conditions would be particularly challenging in the first half of the year due to the negative effects from the COVIT-19 pandemic as the recent restriction measures have constrained production capacity and spending. As such, inflation rate for this year could be negative and heading into deflation.
Based on the following inflation trend for past 55 years, past 6 months is almost going into deflation zone. That could be the reason that why BNM need to cut the OPR rate.
source: tradingeconomics.com
Zoom into past 10 years inflation chart:
source: tradingeconomics.com
How would the lower interest rate benefit us?
1. Lower loan interest rates
With the lower OPR, it simply means that the loan interest rate is lower. For example, if your mortgage loan is pegged to the Base Rate, and OPR reduction will lead to a lower mortgage interest rate, which means that you’ll be paying lower monthly repayments. Isn’t it is a good news for the property investors? Still remember the low interest rate during 2009 time and that is where property start to boom.
2. Lower returns for savings accounts and fixed deposits
Although an OPR reduction is good news for those taking out property loans, savers looking for more returns on their savings accounts and fixed deposits will be disappointed. The interest rates for these savings instruments will be reduced in tandem with the OPR cut. As such, it will be a loser for the savers. We need to make our money work harder for us.
Conclusion
The OPR reduction is certainly a good news to all, especially for ordinary home owners like you and me.
As an property investor, it is certainly a pleasing fact that the amount of monthly installment of our home loans are reduced, this also meaning we have can have more money to continue invest! It will be bad for the saver as the interest rate is low. So invest wisely.
