How will Malaysia’s interest rate cut reshape risk management in banks?

For the first time in five years, Bank Negara Malaysia has trimmed its key interest rate to 2.75% in July 2025. The move is aimed at supporting growth as global trade tensions rise, though views are mixed on whether this is the start of a longer cutting cycle.
 

While this might mean lower borrowing costs for businesses and individuals, it also signals a crucial moment for banks, which are now racing to strengthen how they handle interest rate risk – the financial ripple effect that occurs when loans and deposits do not reprice at the same speed.
 

Managing Interest Rate Risk in the Banking Book (IRRBB) is not just about compliance anymore or a regulatory check, it is about staying competitive in a volatile economy and a value-adding opportunity for strategic asset-liability management.
 

With these Basel guidelines already implemented elsewhere, Malaysian banks are preparing for their imminent local issuance. This will formally elevate IRRBB from a best practice to a regulatory necessity. In essence, IRRBB is the danger that a change in rates will squeeze a bank’s profits or erode the long-term value of its loan book.

Consequently, banks are being forced to move away from clunky spreadsheets and simplistic gap analysis towards advanced systems that can model customer behaviors and simulate how different interest rate changes affecting bank’s earnings and economic value due to changes in interest rates impacting banking book positions.
 

Malaysian banks must rethink how IRRBB is to be managed across functions, from treasury and risk to finance and business, including Asset-Liability Committee (ALCO) taking an overview position. IRRBB should be embedded into business strategy, pricing and product design. It will certainly be a board agenda as we have implemented this in a regional bank and they are keen to know the impact of interest rate being reduced.
 

Banking book Price Value of a Basis Point (PV01), Economic Value of Equity (EVE) impact and Net Interest Income (NII) sensitivity will need to be tabled and discussed at board level given that the measures adapted, such as PV01, do impact business strategy to mitigate interest rate risk and not just for compliance.
 

In conclusion, the recent interest rate cut by Bank Negara Malaysia marks a pivotal moment for the banking sector, compelling banks to reassess their risk management strategies in the face of evolving economic conditions. As they navigate this new landscape, it is essential for banks to transition from traditional methods to more sophisticated approaches that integrate interest rate risk management into their core business strategies.
 

By doing so, they not only comply with upcoming regulatory requirements but also position themselves to thrive in a competitive market. Ultimately, this proactive stance will enable Malaysian banks to better serve their customers while enhancing their resilience against future economic fluctuations.