Moderate impact of OPR cut on Malaysia’s economy

Published on 14 Jul 2025.

Bank Negara Malaysia cut the OPR by 25bps to 2.75% on 9 July, describing the decision as a pre-emptive move to secure economic growth. The decision was mainly prompted by prolonged uncertainties, particularly on the trade front that poses heightened risks to growth. Even as the economy is expected to slow this year, we view the move as “insurance” to cushion against potential adverse shocks (if any). In fact, high-frequency economic indicators point to still-healthy domestic activity levels, despite the volatile external environment. The unemployment rate stood firm at 3.0% in May, while wholesale and retail trade volume continued to grow by 4.1%. Although overall industrial production index (IPI) growth slowed to 0.3% in May, manufacturing IPI still expanded by 2.8%. We estimate 2Q 2025 GDP growth to still hold up at around 4.2% (1Q 2025: 4.4%), with the deceleration largely attributed to the sharp contraction in mining sector activity.

We expect no further adjustments to the OPR for the remainder of the year. This is barring material deterioration in domestic conditions that could suppress growth below our current 3.5%-4.5% forecast range. The forecast already factors in the impact of the recently announced 25% US tariff on Malaysia, which we estimate could trim 2025 growth by circa 0.6 ppts relative to our pre-‘Liberation Day’ baseline. Most of the drag from export losses, net of negligible trade diversion gains, will materialise from 3Q 2025 once the higher tariff kicks-in and temporary support from frontloading fades, assuming no further upside from negotiations.

The rate cut will transmit fairly quickly into the real economy, easing household and business finance expenditures. This may limit the rise of impaired loans within marginal segments in the near term. That said, asset quality remains sound and is not a major concern, with the banking system’s gross impaired loan ratio expected to come in at 1.50% as at end-2025 (end-May 2025: 1.45%). Considering uncertainties on the horizon, the banking system - a bellwether of the economy - will likely experience moderating loan growth this year relative to 2024 (annualised 5M 2025: 3.5%; 2024: 5.5%).

Banks are likely to see only a mild impact on their net interest margins (NIM) from the OPR cut. The average NIM of eight selected local banks clocked in at 2.06% and 2.04% in 2024 and 1Q 2025, respectively. Based on our past discussions with banks, most indicated that a 25-bps cut typically results in a full-year NIM contraction of approximately 2-3 bps. The earlier reduction in the Statutory Reserve Requirement - from 2% to 1% in May 2025 - is expected to offer a slight cushion to margins by releasing some funds for redeployment into higher-yielding assets. Opportunities to realise some gains from bond trading and investment portfolios may also help offset pressures on banks’ profitability.

Analytical contacts Nur Nadia Mazlan (603) 2708 8287 nadia@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my

Amy Lo (603) 2708 8289 amy@ram.com.my

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Moderate impact of OPR cut on Malaysia’s economy