Overall sentiment remains weak despite Bank Negara Malaysia's aggressive monetary policy moves on Wednesday, with analysts saying the good news is muted by worsening unemployment figures and a slowdown in exports.

The stock market barometer, the Kuala Lumpur Composite Index, responded little yesterday, closing at just 5.612 points higher or 0.642 per cent to 879.02.

Analysts also said the market is waiting for a definitive announcement on what the second economic stimulus package entails.

The government had said another stimulus package is on the cards, in addition to the RM7 billion announced last November.

Bank Negara's 75 basis point cut off its Overnight Policy Rate (OPR) will result in banks lowering lending rates, attract more borrowers and allow debtors more disposable income.

The central bank also cut the Statutory Reserve Requirement (SRR) for banks to 2 per cent from 3.5 per cent.

Analysts said by cutting the SRR, Bank Negara is releasing between RM8 billion and RM10 billion into the economy while giving banks more room to lend.

On the other side of the equation, however, there is the risk of banks facing increased loan defaults amid the gloomy business and labour market conditions.

This is despite Malaysian banks entering the current economic slowdown in positions of strength.

The MIDF Group in its report said the banking sector can absorb the effects of a reduction in interest rates, especially on its interest margin, as the industry has entered 2009 in a position of strength. Industry loan growth is still healthy at more than 9 per cent year-on-year as at end November 2008, while the incidence of non-performing loans (NPLs) is low and under control.

Analysts generally gave guarded views on the overall impact the big rate cut would have on the economy.

"Although there may be a positive knee-jerk reaction to the sharp cut, we expect the market to remain weighed down on concerns over the slowing economy," DBS-Vickers said in a report.

OSK Research Sdn Bhd touched on the ringgit, saying the lower interest rates will weigh on the currency as investors seek higher returns elsewhere.

"Weak fundamentals in Malaysia's external balance due to falling export earnings from the commodity sector will also weaken the ringgit in the near term. We are revising our ringgit forecast from an average RM3.45-3.50 to an average RM3.65-3.70 against the greenback," OSK said.

On the rate cut, ECM Libra said bank margins will be somewhat affected as they lower lending rates by a larger quantum than deposit rates.

"We estimate that banks' earnings will be impacted by 5 per cent to 13 per cent on the assumption that BLR will be reduced by the similar quantum as with the OPR cut while deposit rates will be lowered by an average of 35-40bps," it said.

It said while net margins will obviously be impacted, more so for the banks with larger exposures to variable rate loans, the reduction in SRR will cushion this impact somewhat.