Wednesday, July 13, 2016

What to expect from a lower interest rate?

With the reduction of the Overnight Policy Rate by BNM, as seen as a surprise, I really do not see it as a surprise. As mentioned in an earlier article, Malaysia probably is growing at already a growth of below 4% as the results from the first quarter of 4.2% was due to an extra day existed for February this year.

With Brexit and many developed countries such as Japan, some countries in Europe (Germany and several others) already offering bonds at below zero rates, it is soon to bring that pressure for BNM to do the same i.e. lowering its rates.

I guess one of the issues where BNM has taken a "STAY" stance was due to the much weakened RM which caused some uncertainties over the last 12 months or more. Now that the currency seems to be stabilizing (although could have strengthened further which I hope), it is time to take a bolder move for the central bank.

What is that impact of lowering OPR?

Almost certainly, lending rates by banks will go lower by as much as 25 basis points as well. Deposits rates will surely go down as well but I do not see them going lower by that similar quantum as banks nowadays are already facing challenges getting public deposits.

At such a low deposits, people will surely and certainly be looking for alternative investments. It is just that so much uncertainties has put people into the sidelines while looking for more certainties.

At this moment, I would think the lower interest rates would create attraction for investors to look at property sector. This sector will see a double blessing. Firstly, their own loans will be cheaper and for property investors, it will now be cheaper to buy properties due to the lower rates. One thing to be careful of though is, Malaysia is already a high private debt to GDP (90%) nation.

Companies that consistently provide good dividends will certainly be preferred (if not already due to the low deposits rates) as well.

Also companies that depends on much borrowings to operate may definitely benefit from the lower interest rates as long as their borrowings are manageable. In my portfolio, those are like DKSH, Airasia, Ecoworld and even Tropicana. I do not think it will impact Keuro so much as they probably locked in their rates. The only positive for Keuro could be that costs of doing business perhaps would be slightly lower.

Banks will not be that attractive as it is already facing challenges from the low rates. The only strong point for banks is that their non-performing loans are very manageable. I would expect that banks that continue to lend to retail sector to do well.

Despite the lower OPR, what it should happen to RM, today happened a reverse. Whenever banks lower its rates, currencies will go the other way due to the less attractiveness of its rates, but it is doing the opposite for now as probably funds that stay denominated in currencies other than RM is probably buying Malaysian stocks. That seems to be the bigger impact than the RM currency in fact today.

In the long run, it depends on whether the lowering of OPR will bring enough positive impact to the Malaysian economy. That one is hard to phantom as all over the world, growth is really crawling, and it seems that low interest rates are not creating that much of an impact.

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