Experts: OPR hike to cool inflation and buoy the ringgit


PETALING JAYA: As Bank Negara Malaysia (BNM) gradually raises the Overnight Policy Rate (OPR) to pre-pandemic levels, many are worried, especially over higher loan repayments, but experts say there are also benefits to consider.

The central bank raised the interest rate by 25 basis points (bps) to 2.25% on Wednesday on top of the 25bps hike from 1.75% in May this year. The consensus is that another rise is on its way.

The reasons for the hike are obvious. With the new rates, borrowing will become more expensive while interest rates on deposits will rise.BNM hopes to see people spending less and saving more, reducing demand. When demand goes down, so will prices. The idea is to keep inflation under control.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid, however, said there were pros and cons to the interest rate hike.

For one, the man on the street will see high returns for fixed deposits. However, rates are only likely to be higher for new deposits.

As for borrowers, he said existing customers whose financing contract was based on variable interest rate would see an increase in their monthly instalments.

Customers who feel burdened could still turn to agencies such as the Credit Counselling and Debt Management Agency (AKPK) or legitimate financial advisers.

They could also seek to refinance or restructure their existing financing facilities, he added.

The variable rate has its own pros and cons. Although it can be burdensome when the OPR is raised, it also means the borrower will benefit when it is lowered.

Typically, when the economy experience periods of calamities, the BNM may cut rates. The OPR was reduced to a historic low of 1.75% at the height of the Covid-19 pandemic.

“Someone who has a fixed rate financing facility will not enjoy such flexibility when the OPR is reduced,” said Afzanizam.

Meanwhile, he said, a higher interest rate could also improve the value of the ringgit.

This is because higher interest rates tend to attract foreign investment, increasing the demand for and value of the currency.

In reality, though, market sentiments usually dictate the value of a currency, especially in times of economic uncertainties. If that happens, demand for safe haven currencies such as the US dollar, yen, euro and Swiss franc will be higher.

Dr Shankaran Nambiar, Senior Research Fellow at the Malaysian Institute of Economic Research (MIER), said the rate hike would benefit those planning to buy machinery, food and equipment from abroad, as well as those studying abroad. But it would hurt those who have loans to repay for the purchase of property as well as other big ticket items.

“Rate hikes are done to cut inflationary expectations,” he said. “But I don’t know if consumer sentiments are so buoyant as to deserve being dampened now.”

Ambank Research said it had in fact expected BNM to embark on a more aggressive stance by hiking the rate by as much as 50bps to cool inflation and help support the weakening ringgit .

It expects more rate hikes in the months ahead, with the OPR hitting about 3% to 3.25%.

The weakening trend of the ringgit – it now stands at RM4.43 to US$1 – will have a strong impact on imports.

“Importers will pass on the cost to consumers and some under the M40 group could fall into the B40,” Ambank Research said in a note yesterday.

While BNM expects headline inflation to hover around 2.2% to 3.2%, the research house noted that without subsidies, inflation would be around 11%.

It said subsidies already cost the government as much as RM71bil a year and a weaker ringgit would only add more to import bills.

All of which leads to the need to shore up the ringgit, and bring down inflation. A higher OPR does that.

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