Monetary policy remains accommodative

Policy stance supportive of growth and stable prices

THE monetary policy in 2019 remains accommodative and supportive of growth amid stable prices. The overnight policy rate (OPR), which was kept unchanged at 3.25% since January 2018 was reduced by 25 basis points to 3% in May 2019.

The OPR reduction was made by taking into consideration the downside risks on growth from heightened uncertainties in the global environment, trade tensions and extended weaknesses in the prices of commodities.

Meanwhile, with ample liquidity in the financial system, the Statutory Reserve Requirement was held steady at 3.5% of eligible liabilities.

The interest rate in the banking system was lowered in tandem with the OPR adjustment in May 2019. The weighted base rate of commercial banks stood at 3.68% while average lending rate was at 4.82% as at end-july 2019.

The average interest rate on savings deposit of commercial banks was reduced further to 1% as at end-july 2019. Similarly, the interest rates on one-month to 12-months fixed deposits ranged between 2.83% and 3.1%.

Meanwhile, the overall household debt increased slightly to RM1.22 trillion, accounting for 82.2% of gross domestic product as at end-june 2019.

Nevertheless, the debt level has been moderating since 2015 following macro-prudential measures and financial literacy programmes introduced to rein in household debt levels.

The bulk of debt comprises loans for the purchase of residential properties (54.2%), followed by personal use (14.1%) and passenger cars (12.9%). Total household financial assets remain strong at RM2.63 trillion with the debt servicing capacity of households remained intact, supported by stable income and employment growth.

Consequently, the household debt level is expected to remain manageable in 2019 and 2020.

The banking system’s capacity to absorb losses remains robust, supported by its strong capital position. As at end-july 2019, Common Equity Tier 1 Capital, Tier-1 Capital and total capital ratios stood at 13.9%, 14.6% and 17.9% respectively.

The levels were well above the Basel III minimum regulatory levels of 4.5%, 6% and 8% of risk-weighted assets respectively.

Furthermore, excess total capital buffer

remained high at Rm111.4bil.

In the first seven months of 2019, the banking system recorded a higher pre-tax profit of Rm23.2bil despite a challenging operating environment. The interest/ finance-related activities contributed about 65.3% of gross income. Meanwhile, returns on assets and equity remained steady at 1.4% and 12.6% respectively.

Loan quality of the banking system remained sound throughout the period with stable net impaired loans ratio of 1% as at end-july 2019.