BNM cuts OPR for the 4th time: How it affects our lives?
On 7 July 2020, the Malaysian Central Bank (Bank Negara Malaysia – BNM) cut the Overnight Policy Rate (OPR) for the fourth time by 0.25% to a record low of 1.75%.
This is part of what the financial guys call “Monetary Policy” and is happening worldwide to stimulate the economy as a result of the COVID-19 crisis bringing the world’s economy to a grinding stop.
Malaysia is not alone in this
Apart from Malaysia, other countries in the world have also used “Monetary Policy” to stimulate their economies.
United States: The Federal Reserve cuts rates to zero on 15 March 2020 (Article)
England: The Bank of England cuts interest rates to 0.1% on 19 March 2020 (Article)
Singapore: Monetary Authority of Singapore reduces the rate of appreciation of the policy band to zero (Article) FYI, Singapore’s monetary policy adjusts the exchange rate rather than the interest rates/money supply.
Asia Pacific: Indonesia, Australia, the Philippines and Taiwan cut benchmark rates (Article)
Understanding Monetary Policy
Imagine a scene where parents give monthly allowances to their kids:
The parents of two gave each kid a monthly allowance of RM300. They also set a rule that they will top up an additional RM1 for every RM50 that was not spent and kept in the piggy bank by end of the month. This effectively translates to a 2% “interest rate return”.
Kid A can’t be bothered and spent every dollar by month end. Kid B saw the potential of getting more cash to buy more expensive toys, so Kid B spends sparingly and starts saving money in the piggy bank.
Now, what if the parents suddenly cut the “interest rate return” to 0%?
There will be no difference for Kid A who spends everything anyway. However, Kid B will figure out that saving doesn’t generate more money anymore. This will encourage Kid B to spend the money since there is no longer an incentive to save the money.
This will cause a flood of money to the “economy” as Kid B takes out more money to spend. In a simple way, this is how an Expansionary Monetary Policy works.
The OPR Cuts So Far
- 22 January 2020: Reduced from 3% to 2.75%
- 3 March 2020: Reduced to 2.5%
- 5 May 2020: Reduced to 2%
- 7 July 2020: Reduced to 1.75%
Will it reduce further? Only time will tell…
How does it affect our lives?
Benefit: Lowers (some) monthly repayment of bank loans
For those who have mortgage loans, we would notice that our monthly repayments are reduced every time the OPR was cut.
I received 3 letters so far on the lowered monthly installments. Waiting on another one based on the latest OPR cut.
Mortgage loans in Malaysia are typically pegged to a rate called “Base Rate”, which is directly impacted by any changes in the OPR. The interest rate is quoted as “Base Rate + x%”.
If there is an OPR cut -> Base Rate falls -> our mortgage loan interest rate falls -> Yay!
This means that our monthly disposable income increases since we are paying less towards our mortgage commitments. There will be more spending in the economy with the increase of disposable income, for sure. But… BTMar will be putting that extra cash to work rather than spending it away.
What this does NOT affect: Loans that run with fixed or flat interest rates. Most commonly car loans or personal loans.
Drawback: Lowers (all) returns on savings and fixed deposits
At the same time, we also see banks reduce interest rates offered to us when we deposit our money with them, be it in savings accounts or fixed deposits.
This presents a problem if the majority of our money is deposited in a savings account. Inflation in Malaysia is on average about 2% – 3% yearly, which means that the prices of things around us increase about 2% – 3% every year. If our savings accounts fetch less than that on a yearly basis, then we are effectively losing money by just leaving it in the savings account. Inflation up 3%, savings up 1%, we lose 2%.
However, those who have locked in your higher rates on fixed deposits (especially those with promotions) will not be affected. Once it’s matured and you have to renew or withdraw, then it will be renewed at the lower rate unless the OPR reverted to a higher rate when that happens.
I’ve spoken to various people on this and we all drew the same conclusions. This move will not be as impactful as it intended as people are generally worried about job prospects at this juncture so they’d rather have a buffer in their savings accounts. Furthermore, people generally don’t know where else to move the money to even if they want to.
What should we do then?
Firstly, give thanks as our monthly commitment has been reduced, which translates to more monthly disposable income.
Ensure we have sufficient savings in our savings accounts as emergency funds. Conservatively, I’ll recommend keeping at least 6 months’ worth of living expenses. If you are unsure how to quantify your monthly living expenses, I’ve mentioned it in my other post with a template that you can use to calculate it.
Our additional funds should be moved to higher interest account or promotional fixed deposits as laid out in my post about the BEST savings account in Malaysia. However, do take note that the rates may be different now given the OPR cut.
Other choices available that are relatively lower risk are money market funds, income focused funds or bond markets. Can speak to your mutual fund provider or banks about what options are available to you. Or you can also look at available options through Fundsupermart.
This is assuming we do not move these funds into higher risk ventures. Generally, I’d recommend keeping the risk level low as we don’t want to be taking on unnecessary risk for this portion of our funds.
Update: More details have been shared in my post on the 5 choices we can take in face of the OPR cut!
