OPR Cut By 0.25%: How Will It Affect You?

OPR Cut By 0.25%: How Will It Affect You?

Bank Negara Malaysia (BNM) announced another reduction of the overnight policy rate (OPR) by 25 basis points to 1.75% on July 7, 2020.

This is the fourth time the OPR has been decreased this year, pushing it to a record low.

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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 the country’s employment, economic growth and inflation. It is an indicator of the health of a country’s overall economy and banking system.

Why did BNM reduce the OPR?

The OPR was reduced to help the economy recover from the impact of the COVID-19 pandemic.

“The impact of COVID-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year,” said BNM in a statement released today.

“Several major economies have begun relaxing measures to contain the COVID-19 pandemic, leading to the gradual resumption of economic activity,” said BNM, noting that financial conditions have improved. “The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook.”

However, the pace of economic recovery is subject to a few factors, including the possibility of further outbreaks of the pandemic, poor labour market conditions and global growth conditions.

“Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices,” added BNM.

How does it affect you?

So, what does this mean to Malaysians?

With the 25 basis point reduction in borrowing rates, consumers will be able to see a hike in their disposable income due to the reduction in interest payments. Consumers will have more cash on hand to spend, which will likely spur the domestic economy.

1. Lower loan interest rates

Any changes in the OPR will impact loans that use the Base Rate (BR) or the Base Financing Rate (BFR) to determine the interest rate by which it will lend to consumers.

If the OPR reduces by 0.25%, and banks decide to stick to their current profit margins, then your loan’s BR will also reduce by 0.25%. This will lower your loan’s interest rate.

For example, if your mortgage loan is pegged to the BR, and OPR reduction will lead to a lower mortgage interest rate, which means that you’ll be paying lower monthly repayments. Here’s an example of how this works:

Loan amount
RM500,000
Loan tenure
30 years
BR: 2.80%
BR: 2.80% - 0.25%
= 2.55%
Home loan interest rate
3.60%
(3.60% + 0.8%)
3.35%
(2.55% + 0.8%)
Monthly repayment
RM2,273
RM2,204
Total interest paid over 30 years
RM318,362
RM293,284

Based on the example above, the 0.25% reduction will result in RM25,078 savings over a 30-year loan tenure. Borrowers will be able to see about RM69 reduction in their monthly repayment based on the example above. This means paying around 8% less in interest payments over the loan tenure.

2. Lower returns for savings accounts and fixed deposits

Though 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.

But this won’t affect any fixed deposits that you have placed prior to the bank’s revision of fixed deposit rates.

How does it affect the country?

While consumers may welcome cheaper borrowing costs, this means lower profit margins for banks. The current OPR cut may affect banking stocks in the short-term.

Nevertheless, the OPR cut could be a positive move for the economy.

“A rate cut should provide a positive impetus to private consumption which is the anchor for growth and investment with exports complementing in 2020,” said AmBank chief economist and head of research, Dr Anthony Dass, during the start of the year.

Businesses may fare better thanks to the rate cut, as there will be lower borrowing costs and increased domestic spending.

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