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When rates are cut, what does it say?

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This was widely shared by all media whether big or small yesterday. Even within Whatsapp groups, I got the same news no less than 5 times. Okay, so Bank Negara Malaysia (BNM) has decided to cut the Overnight Policy Rate (OPR) to 3%. It’s a reduction of 0.25% and this was the FIRST time they have done so since July 2016. 3 years ago! Many many quarters. Why now then? To summarise in an easy to understand manner.

Accommodative stance. Rates are cut because BNM wants to continue its accommodative stance to the economy. In other words, we are not growing so fast that the BNM wants to slow it down. Right now, we are growing but if there are some signs that it may be slowing down, BNM takes a pro-active step to continue helping economy to grow.

How could lower rates help? Lower rates will help to push for more investments. Businesses may think it’s attractive to invest more by borrowing since rates are now lower. Some potential home buyers for example may also be encouraged to buy that property they want because the rates will be slightly lower too. Some people who has tons of money in FD may want to withdraw a bit and invest in some other instruments because they may feel the FD rate is getting too low for their liking.

Confidence boosting. When people spend just a little bit more, the effects on the economy is multiplied. This is called multiplier effect. Very briefly. We spend an extra RM5 per week at the convenience store. That convenience store will order more items from the wholesaler. The wholesaler will order more from the manufacturer. The manufacturer will order more raw materials. That seller of raw material will then have money to buy in the convenience store… Imagine if that RM5 was not spent in the first place…

Anyway, for a more professional way of saying it, please do refer to an article below. Good reference points.

Article in thestar.com.my BNM says the baseline projection is for the Malaysian economy to grow within the projected range of 4.3% – 4.8%. Some things BNM said:

“However, there are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.”

“The adjustment to the OPR is therefore intended to preserve the degree of monetary accommodativeness. 

“This is consistent with the monetary policy stance of supporting a steady growth path amid price stability. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.”

“For Malaysia, latest developments point towards moderate economic activity in the first quarter of 2019. 

“Looking ahead, slowing global demand conditions and subdued growth of key trading partners will continue to weigh on the external sector.”

Something food for the domestic market is that we have a stable labour market conditions and capacity expansion in key sectors will continue to drive household and capital spending. Headline inflation increased to 0.2% in March 2019 (February: -0.4%), due mainly to the less negative transport inflation at -3.0% (February: -6.8%). Underlying inflation, as measured by core inflation remained stable at 1.6% in March 2019. Article in thestar.com.my

Remember this earlier article? Deflation better than inflation? Economics is an interesting subject. It’s everything about a BALANCED growth. If the economy grows too fast, there are too many speculative elements. Businesses expand way too fast. Developers build way too many homes. People spend way too much. Well, what happens next would be an economic crisis. Thus, what will happen if we are growing way too fast in the future? Well, BNM will take pro-active steps too by INCREASING the rates. It will then slow down speculative elements. make people think twice before buying a property etc… Earlier article here: Would you buy a home if interest rate is 14%? Happy understanding.

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Next suggested article: Buy based on fundamental not speculatively. Buying based on WHY

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