BNM lowers OPR amid trade, demand risks

Malaysian Reserve

2 days ago

Move seen as early buffer, not start of easing cycle — analysts split on further cuts
by RUPINDER SINGH
IN A move that had been anticipated by a narrow majority of analysts, but still marked a significant shift in tone, Bank Negara Malaysia (BNM) reduced the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.75% on July 9.
This is the central bank's first rate cut since July 2020, and comes amid growing external uncertainties, including the looming implementation of US tariffs and fragile global demand conditions.
The decision signals a clear shift toward a more accommodative monetary stance, driven by the need to preemptively support growth while keeping inflationary pressures in check. In its Monetary Policy Statement (MPS), BNM said the rate cut was a 'preemptive step to safeguard the domestic growth trajectory amid contained inflationary pressures'.
The Statutory Reserve Requirement (SRR) was left unchanged at 1%, following a 100bps reduction in May that injected about RM19 billion into the banking system.
BNM now emphasises the SRR as a liquidity tool, not a signalling mechanism.
Since the SRR cut, the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) has eased from 3.7% to 3.5%, signalling improved interbank funding conditions.
Why the Cut Now?
The move comes against a backdrop of increasing downside risks to Malaysia's growth.
The Ministry of Investment, Trade and Industry (MITI) is currently in negotiations with US officials to forestall a 25% tariff imposition on Malaysian exports — a deadline now extended to Aug 1.
BNM's MPS flagged that the balance of risks remains tilted to the downside, particularly due to 'slower global trade, weaker sentiment, and lower-than-expected commodity production.'
Public Investment Bank Bhd (PublicInvest Research) noted that while the July MPS retained a cautious tone, the language was 'toned down slightly' from earlier statements, replacing more alarming references to a 'deeper economic slowdown' with a cleaner framing of persistent, but not catastrophic, risks.
UOB Global Economics added that although domestic growth has been relatively resilient, 'the eventual tariff landing remains fluid, reflecting ongoing uncertainties in the negotiation process'. This introduces a great deal of ambiguity in Malaysia's export outlook, particularly for sectors such as electrical and electronics (E&E) and semiconductors.
At the same time, external trade data has started to show signs of deceleration.
Exports are expected to grow by just 3.5% this year, down from 5.7% in 2024.
A combination of slowing global demand and anticipated restrictions on artificial intelligence (AI) chip shipments to Malaysia and Thailand by the US could further weigh on sentiment and performance in key export industries.
On the domestic front, although labour markets have held up and household consumption remains stable, growth momentum has become increasingly reliant on domestic investments and policy-driven spending.
According to PublicInvest Research, 'Growth is expected to be supported by resilient domestic demand, with employment and wage growth, particularly within domestic-oriented sectors, alongside income-related policy measures, continuing to support household spending.'
BNM appears to be using the current window — before the global slowdown becomes more entrenched or policy uncertainty in the US crystallises into real economic fallout — to build buffers.
As UOB noted, 'Taken together, we think incoming data (particularly GDP and external trade), developments of global tariff policy and geopolitical events are key determinants for the future rate path.'
This backdrop has opened up space for BNM to make a measured cut without triggering volatility in capital flows or compromising financial stability.
The central bank still maintains a positive real-interest rate environment, suggesting that it retains further room to ease if needed, without falling behind the curve on inflation or currency risk.
Implications for the Banking Sector
According to Hong Leong Investment Bank (HLIB Research), the OPR cut will exert near-term pressure on banks' net interest margins (NIMs), given that loan repricing tends to occur faster than deposit repricing.
Banks with a higher proportion of floating-rate loans such as Affin Bank Group Bhd and Bank Islam Malaysia Bhd (BIMB) are expected to be more adversely affected.
Conversely, AMMB Holdings Bhd and CIMB Group Holdings Bhd, with more balanced deposit structures and loan books, are likely to weather the rate cut with minimal disruption to margins.
HLIB Research estimates that the 25bps cut will result in a sector-wide NIM compression of 3bps-4bps and a corresponding 2%-3% decline in profit forecasts, barring any mitigating factors.
However, banks had already begun adjusting fixed-deposit rates downwards by 5bps-20bps since April, effectively preempting part of the OPR move.
This proactive stance may soften the immediate earnings impact.
Moreover, HLIB Research sees three mitigating factors cushioning the sector from a more significant drag:
(i) The recent SRR cut has injected approximately RM19 billion in fresh liquidity into the system, giving banks more room to manage funding cost pressures.
(ii) The easing of deposit competition is expected to lower funding costs further. As promotional fixed-deposit rates normalise, banks will likely benefit from a more stable deposit base.
(iii) The banking sector has pivoted to a more disciplined approach in loan expansion and funding strategies, improving asset-liability matching and capital efficiency.
Importantly, the sector's resilience is underpinned by healthy capital buffers and ample preventive provisioning.
With common equity tier 1 (CET1) ratios for major banks well above regulatory minimums, and loan loss coverage remaining elevated, the system is adequately cushioned against near-term earnings volatility.
Historical patterns also suggest that NIM compression after an OPR cut tends to be short-lived.
Following the last rate cut in July 2020, sector NIMs actually expanded in the quarters that followed, due to the lagged repricing of deposits and improved bond portfolio valuations amid falling yields.
Public Bank and Malayan Banking Bhd (Maybank), which traditionally maintain a conservative asset profile, may experience less earnings volatility compared to high-beta plays like CIMB Bank or RHB Bank Bhd.
That said, CIMB Bank and AMMB are viewed as attractive rebound proxies due to their higher operating leverage and more cyclical loan books.
Looking ahead, HLIB Research maintains its 'Overweight' stance on the banking sector.
'We view the OPR cut in early second half of 2025 (2H25) as a positive development, as it helps to remove one of the key share price overhangs,' it said.
CIMB, AMMB and RHB Bank are its top picks, offering a mix of cyclical upside and defensible balance sheets.
The broader sector is also supported by a 5.4% average dividend yield, which offers a valuation cushion in a volatile market.
Nonetheless, risks remain.
A sharper-than-expected economic slowdown, prolonged deposit pricing pressure, or an escalation in global trade tensions could temper the sector's resilience.
Investors will be closely monitoring the upcoming earnings season to assess how individual banks are managing margin pressure and loan growth in the new rate environment.
What's Next for Policy?
Economists remain divided on whether BNM's latest move marks the beginning of a broader easing cycle, or a one-off recalibration to address rising uncertainties.
While the July policy decision reaffirms BNM's readiness to act preemptively, the central bank also signalled that future decisions will be data-dependent rather than part of a pre-set path.
PublicInvest Research expects the current 2.75% OPR level to be maintained through year-end.
'We assess BNM's policy bias as conditionally accommodative, with any further adjustment contingent on a marked deterioration in global conditions or more pronounced domestic weakness,' it said.
'With real policy rates still in positive territory and inflation expectations well anchored, the move appears intended to provide an early buffer rather than mark the start of a full easing cycle.'
UOB, however, continues to forecast one additional cut.
'The current risk assessment and economic landscape still support our view for an additional 25bps cut in the OPR to 2.50% by end-fourth quarter of 2025 (4Q25),' it noted.
Two more Monetary Policy Committee (MPC) meetings remain, scheduled to run over two-days, starting on Sept 3 and Nov 5.
Analysts say the 2Q GDP release on July 18, the government's updated growth forecast later this month, and the tabling of the 13th Malaysia Plan (13MP) on July 28 will be key inputs into BNM's next decisions.
Developments in US trade negotiations and potential tariff actions will also be closely watched.
BNM has noted that there is still policy space should the need arise.
Analysts interpret this as room for a further rate cut if growth falters or global volatility intensifies.
Until then, BNM is expected to remain in wait-and-see mode, guided by data and external developments.
Market watchers will also be parsing BNM's upcoming quarterly Economic and Financial Developments report for deeper insight into the central bank's internal projections.
Till then, investors can expect BNM to stay in a data-driven wait-and-see mode, with monetary tools calibrated to balance resilience and responsiveness.
Markets, Growth and Broader Outlook
Malaysia's economic growth trajectory remains intact, though downside risks have become more pronounced.
PublicInvest Research maintains its 2025 GDP forecast at 4.2%, down from 5.1% in 2024, reflecting a moderation driven largely by external headwinds.
UOB, meanwhile, anticipated 2Q GDP to ease to 3.8% year-on-year (YoY) from 4.4% in the 1Q, citing a slowdown in exports and manufacturing output.
Despite these external drags, domestic fundamentals remain resilient.
Employment levels continue to improve, with the unemployment rate forecast to dip further to 3.2% this year.
Wage growth, particularly in the domestic-oriented sectors, is expected to support private consumption alongside targeted government fiscal measures.
'Growth is expected to be supported by resilient domestic demand, with employment and wage growth continuing to support household spending,' noted PublicInvest Research.
On the investment front, both private and public sector activity is underpinned by multi-year project pipelines and rising realisation rates of previously approved investments.
Infrastructure rollouts under the 12MP and catalytic projects tied to the upcoming 13MP are also likely to lend support to construction and services segments in the 2H.
That said, much hinges on policy clarity and investor confidence.
The tabling of the 13MP in Parliament on July 28 is expected to offer a strategic roadmap for medium-term development, fiscal consolidation and industrial trans- formation. Investors will be scrutinising the plan for details on infrastructure priorities, digital economy integration and green transition funding mechanisms.
Externally, the picture remains clouded by geopolitical tensions, volatile commodity markets and uncertainty over US trade policy. The 90-day pause on reciprocal tariffs by the US, which expired on July 9, has been extended to Aug 1.
According to PublicInvest Research, a letter from the White House dated July 7 reaffirmed the deadline, though the door remains open for further negotiations.
BNM has acknowledged these uncertainties but continues to believe that structural reforms and ongoing fiscal consolidation efforts will anchor market confidence.
Meanwhile, Malaysia's broad money supply (M3) rose 2.7% YoY in May, indicating adequate liquidity in the system.
Core inflation eased to 1.8% YoY in May, down from 2% in April, supporting BNM's view that inflationary pressures remain contained.
Despite subsidy rationalisation and Sales and Service Tax (SST) expansion, second-round effects remain limited.
In capital markets, the FTSE Bursa Malaysia KLCI has remained range-bound in recent weeks, reflecting a wait-and-see stance by investors.
The financial sector, buoyed by attractive valuations and strong dividend yields, remains a key pillar of support, while defensive sectors like utilities and healthcare have outperformed amid broader risk aversion.
Currency-wise, the ringgit's year-to-date (YTD) appreciation of over 5% against the US dollar reflects improving investor sentiment, bolstered by a narrowing policy rate differential with the US Federal Reserve and positive trade balances.
Analysts expect the ringgit to trade within the 4.10-4.25 range through year-end, barring major external shocks.
Looking forward, Malaysia's economic narrative for the rest of 2025 will be defined by its ability to sustain domestic demand, maintain policy credibility, and navigate external risks.
'We expect domestic activity to remain supported by ongoing reforms and investment execution,' said UOB.
'However, the external environment will remain fluid, and Malaysia's exposure to global trade and capital flows means the outlook could shift quickly.'
In sum, while the OPR cut sends a clear message of growth support, it also sets the stage for a careful recalibration of macro policy amid persistent volatility.
The weeks ahead, marked by economic data releases, policy announcements, and international developments, will be pivotal in shaping market sentiment and policy trajectories.
This article first appeared in The Malaysian Reserve weekly print edition