KUALA LUMPUR (April 3): A cut on the overnight policy rate (OPR) by Bank Negara Malaysia (BNM) may negatively impact banks' profitability in Malaysia, according to credit rating firm Moody's Investors Service.

Speaking to a media briefing today on the firm's credit outlook on Malaysia for 2019, Moody's senior analyst for financial institutions group in Asia, Simon Chen, said a downward adjustment in interest rates will "definitely lead to margin pressures" for the banks.

"So the question is how banks can try to overcome that (margin pressures) with higher loan growth. My take on loan growth is that it will continue to be quite sluggish given that sentiment is still pretty weak on the ground," he said.

Chen said the sentiment he was referring to is the current weak household and corporate demand for loans given the increasing external headwinds faced by Malaysia. This includes slowing global growth, uncertainty in US monetary policy, and heightened trade tensions between the US and China.

However, Chen opined that BNM has always been focusing more on stability of the financial system and balancing growth as opposed to inflationary concerns. So it may be of the central bank's interest to keep the OPR at 3.25%.

"I think the outlook on inflation has been quite stable, so we generally think that central banks globally are more keen on maintaining rates [at a] stable [level]," he said.

Commenting on the possibility of a rate cut in 2019, Moody's senior analyst for sovereign risk group, Anushka Shah, said given the inflation rate is within BNM's target, there is scope for possible policy accommodation via a rate cut.

"I think the central bank would look at various factors including global trends and capital flow movements before it makes a decision. But it (rate cut) certainly is not something that we would rule out," she said.