Bank Negara cuts OPR by half percentage point

Worried about a growing risk of an economic contraction this year, Bank Negara has cut the overnight policy rate (OPR) by 50 basis points, or half a percentage point, to 2% as the global economy continues to deteriorate.

In a statement yesterday, the central bank announced the statutory reserve requirement (SRR) would also be cut from 2% to 1% from March 1 to reduce the cost to banks.

The ceiling and floor rates of the corridor for the OPR were correspondingly reduced to 2.25% and 1.75% respectively.

“The major advanced economies are experiencing a deepening economic contraction, while the regional economies are experiencing a rapid slowdown,’’ said Bank Negara in its monetary policy statement.

“The impact of the rapid decline in global demand on trade, production and investment activities in the Asian region has intensified.”

It said domestic economic conditions were expected to continue to remain challenging in the coming quarters with the continued deterioration of the global economy.

“While this has raised the risk of an economic contraction in 2009, the prospects remain intact for an economic recovery once global conditions stabilise given that the economy is not over-leveraged, the financial system remains sound, and the external position is healthy,’’ Bank Negara said.

The central bank said the turmoil in the international financial markets had also been protracted and that while a number of economies had put in place stimulus measures to manage the downturn, their impact on the economy had yet to take effect.

“The downside risks to the global economic outlook have increased significantly,’’ it added.

On Jan 21, Bank Negara cut the OPR by 75 basis points to 2.5% and slashed the SRR from 3.5% to 2%.

“This is the first time since the crisis erupted that the central bank has acknowledged the possibility of the economy registering a contraction this year,’’ said Maybank Investment Bank chief economist Suhaimi Illias.

“They are also reacting to the fourth quarter GDP number that will be released this week.’’

Bank Negara said the international economic and financial environment had deteriorated sharply in the recent quarter and that the Malaysian economy had been adversely impacted by these global developments.

“Exports and industrial production have declined steeply, while private investment activities have slowed down in recent months as businesses scaled back their spending. Consumer sentiment has also been affected by the weakening conditions in the labour market,’’ it said.

With inflation on a moderating trend, Bank Negara said the task of macroeconomic policy was to support domestic demand until conditions in the global economy show signs of normalisation.

“Further measures will be introduced to ensure continuous access to credit as well as to minimise the impact of the economic downturn on specific affected groups,’’ it said.