From Mazli Noor
Lowering the overnight policy rate (OPR) to 2.75% is premature for a few salient reasons.
If it is pre-emptive ahead of tariffs that will potentially be imposed by Washington, then it is a premature one, with still too many uncertainties in both domestic and overseas markets. The only certainty is that the negotiations are still ongoing, with little concrete or definitive action by either party.
In such fluid circumstances, literally anything can occur. For example, the initial tariff of 24% which was suspended for 90 days pending negotiations was arbitrarily increased to 25%, with Washington citing numerous tariffs and non-tariff policies and trade barriers that remain to be addressed, including matters such as halal certification and government procurement.
Given that, at most, interest rate changes will only affect markets for up to 12 months, it is arguably more effective if all trade and related factors are known ahead of any change in the OPR.
Although the impact of OPR changes is generally offset within these estimated 12 months, there are elements that respond almost instantly. Among them is, of course, the stock market, which will face increasing downward pressures as foreign capital exits in search of better returns elsewhere.
It is entirely plausible to suggest that Malaysia withholds lowering its OPR in order to take advantage of other markets that are, making it more attractive to that foreign capital searching for a new home.
This is not speculative, as shown when RM516.6 million in foreign capital flowed out of Malaysian markets in the week following the rate cut.
Foreign capital flows have a direct effect on local currencies. Any significant outflows, for example, are capable of putting downward pressure, and is exacerbated by the uncertainty of how long such outflows will last. The concern is its subsequent ripple effects, chief among them being making imports more expensive.
Such a consequence would put undue pressure on the country’s trade surplus, which fell to RM759.9 million in May 2025, a fall of 92.3% compared with a year earlier and 85.2% compared with the month before.
While there are measures available to defend the ringgit, they are limited in nature and, simply put, unsustainable. These include, for example, the draining of the country’s international reserves, or repatriating profits on her overseas investments.
The lending sector will also be heavily impacted by the reduction.
On face value, the lower rates should be good news. As it stands, Malaysian household debt is already one of the highest in Asean, coming in at RM1.63 trillion, or 84.2% of the country’s gross domestic product (GDP).
Recent cost-of-living pressures are anticipated to worsen due to the sales and service tax expansion and the rationalisation of petrol subsidies.
Credit card debt, meanwhile, has increased significantly to RM4.67 billion, an increase of 24.7% from the year before. Buy now, pay later (BNPL) activities are also increasing, reflecting an increasingly stressful situation for Malaysian households.
All these, however, have not convinced the markets, with foreign investors selling off RM237.6 million in banking-related shares in the week following the reduction – and was in fact the sector witnessing the highest sell-off by foreign investors. And with growth in the lending sector still suspect, we are running out of potential growth sectors to rely on.
Finally, it is arguable that the economy even needs such a reduction right now. Consumer inflation rates in May 2025 was just 1.2%, the lowest in four years, with the consumer price index increasing by just 0.1% in May 2025.
Preliminary GDP data for the second quarter of 2025 from the statistics department also puts growth at 4.5% compared with the second quarter of 2024 – a higher figure than the 4.2% forecast by Bloomberg.
So why the rush to lower the OPR now?
Mazli Noor serves on the boards of several public and private companies and is an FMT reader.
The views expressed are those of the writer and do not necessarily reflect those of FMT.