Interest rate cut needs institutional follow through to be adequate

Malaysian Reserve

2 days ago

The OPR cut is important, but banks and govt machineries at the federal, state and local level need to make a paradigm shift to promote expansionary sentiments
LAST week, Bank Negara Malaysia (BNM) duly delivered what was expected from the central bank, lowering the banking system's interest rate to promote spending and investment — in theory, at least.
The benchmark Overnight Policy Rate (OPR) was cut down for the first time since July 2020, by 25 basis points (bps) to 1.75%, heralding an incoming economic slowdown and trade headwinds.
With the global economic growth expected to moderate in the second half of the year (2H25) against the backdrop of trade tensions and geopolitical risk, Malaysia cannot afford to allow domestic demand to be weighed down by external factors.
The Malaysian economic growth is already projected to slow down to around 4% this year, from 5.5% in 2024 as US President Donald Trump's tariff tantrum continues, dampening export momentum.
Nonetheless, economists are confident that domestic demand, driven by labour market improvements and tourism recovery, will remain resilient.
Upward sentiments in the labour market are underlined by the unemployment rate holding steady at a decade-low of 3% in May 2025, supported by the stable growth pace of the labour force (0.2% month-to-month) and decline in loss of employment (-14%).
The tourism industry, in the meantime, is estimated to record up to 7.8% growth, or 26.9 million tourist arrivals this year, marking a full recovery to pre-Covid-19 levels in 2019. The World Travel & Tourism Council projects that the tourism and travel industry will contribute 11.3% to the national GDP, or RM332 billion, in 2025, significantly higher than last year's RM218 billion.
However, economists have cautioned that policy interventions by the central bank would be useless if the banking system and the whole government machinery — either at federal, state or local govt level — fail to shift-up and follow through.
The lowering of OPR will only affect consumers' pockets positively if banks decide to channel the savings to real loan rates.
An economist also cautioned that despite OPR being cut down to 2.75% the real interest rate stood at 1.55%, which is still high by historical standards.
The long-term average real interest rate in Malaysia is 0.88%, which means borrowers are still paying an expensive cost for loans in real terms, he argued.
Monetary policy needs to be accommodative, and business policy needs to be entrepreneur and people-friendly for consumer confidence to flourish and spending to grow.
Unbeknownst to the public, local governments are especially influential in determining spending patterns among their constituents, as they have wide-ranging, self-interpreted local laws at their disposal, which, in some occasions, are ridiculously baffling and beyond common sense.
Take, for instance, one particular state city where its enforcement division is making restrictive interpretations of the law governing food kiosks, which, in effect, sabotage genuine entrepreneurs and discourage customers from frequenting the joint.
This kiosk, selling toasts and simple breakfast delicacies at a local lake park, was a hit and went viral even before the word 'viral' was invented.
It was, however, recently slapped with a weird ruling by the local authority, banning it from placing tables and chairs for its customers, even though the area in front of the kiosk is vacant and clearly designed to accommodate dining chairs and tables.
Weird, to say the least. But frankly speaking, it clearly looks like spiteful sabotage by the very people who are supposed to promote and support entrepreneurship.
Now, with the aligning of powers between the state and federal, the government might want to consider covering these local councils as part of the economic support system.
It is developmental economy on a longer horizon, which should be a priority for the nation.
Asuki Abas is the editor of The Malaysian Reserve, and a former entrepreneur disillusioned with bureaucracy.
This article first appeared in The Malaysian Reserve weekly print edition