Is Interest Rate Really That Low?

The Bank Negara Malaysia ("BNM"), the central bank of Malaysia, has announced a deduction of 75 basis points on the Overnight Policy Rate. With the cut, the new policy rate is 2.5%.

Besides this, BNM has also lowered the statutory reserve requirement that financial institutions have to place with the central bank, to 2% from 3.5%. Banks will have more liquidity to fund their lendings.

With this new policy rate, banks in Malaysia get to borrow at the rate of 2.5%

This is really good news for existing loans as borrowers will be paying lesser on lower interest rate. But how much will be passed on to the banks' customers?

Bearing in mind that the current Base Lending Rate ("BLR") imposed across the board is 6.5%. A difference of 4%. Banks are expected to reduce the BLR to reflect the cut in the overnight policy rate.

Two major local banks have announced that their new BLR will be 5.95%, only a deduction of 0.55%. Most banks will follow suit. But I find that the banks are still looking for more profits even at this trying times. BNM reduced the rate due to "downside risks to world economic growth as inflation cools amid weakening demand and falling commodity prices".

Banks don't see the same for their profit oriented businesses. Public Bank Berhad ("PBB") had just announced a RM2.58 billion profit for year 2008. That's only superb in the eyes of their shareholders.

Banks borrow at 2.5% and loan out their funds at 5.95%. Whatever rates that BNM decided to lower may not reflect savings for banks' customers as the BLR determines the actual rate that borrowers will pay in the end. 5.95% is still high.

I'm happy with that cut in BLR as my home loan with PBB is BLR minus 2.1%. Effectively, my interest rate is at 3.85% now.

Reading: Interest rates could fall further - The Edge Daily
Tags: Bank Negara Malaysia, BNM, Overnight Policy Rate, Base Lending Rate