Intervention against inflation

NOBODY appreciates a hike in loan interest. It eats into the pocket. But even worse is the bane of all – uncontrolled inflation.

Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus made an interesting point at the central bank’s briefing on the first quarter of 2023 last Friday.

She said that Bank Negara wants to ensure that economic growth is sustainable and that it would be detrimental if inflation is not moderated and spirals out of control due to excessive spending.

“I must also correct the perception that we want growth to be slower. That is certainly not true. Which one is more kejam (cruel)? (Increasing) OPR, or if our inflation goes out of control?” the governor was reported as saying.

She then explained that if there is a sudden rise in inflation, everyone’s purchasing power will be impacted regardless of whether they have a loan or not.

The governor has a point.

When the Monetary Policy Committee (MPC) meets every two months to decide on interest rates, there will always be voices from the ground opposing another round of rate hikes.

There is no doubt that higher interest rates would impact loans with a variable or floating interest rate.

For instance, a couple whose monthly instalment for a house they purchased in 2020 was RM2,600 in March that year. Come July, they will have to pay RM3,150. That is an increase of RM550. The M40 couple say they will cut back on leisure spending to service the higher loan. Lifestyle adjustments are certainly needed.

Having said that, it is important to note that not all borrowers with loans will be affected.

According to Bank Negara’s 2022 Annual Report, about 50% of the total number of household loans were fixed-rate loans, meaning they would not be affected by OPR movements.

On the other hand, a drastic increase in inflation will burn more holes in our pockets. Purchasing power will be hurt by an uncontrolled rise in inflation.

According to an expert, inflation would have been much higher had there not been OPR hikes.

“If there was no OPR hike, I believe the inflation can go much higher than the 3.3% that we achieved for 2022 (2021: 2.5%),” says Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

“One has to remember that bringing down inflation does not mean prices will fall. It’s quite the opposite. But the price increases will be slower. In some countries, they typically set 2% as their inflation target, like those in the United States and Europe. So this could result in the inflation rate rising by 2.0% per annum, which is acceptable as price increases are stable and predictable,” he explains.

Have we been caught off guard by these increases in OPR? Not really.

Earlier this month, Bank Negara announced a 25 basis point hike, bringing the OPR back to the pre-pandemic level of 3%. To put it into perspective, the OPR was slashed to a historic low at the height of the pandemic, given the emergency at hand.

In 2020, we were hit by the Covid-19-induced twin crises of a health emergency that claimed more than 30,000 lives in Malaysia and a global economy brought to shambles with lockdowns, disruption of economic activities, and many people being rendered unemployed.

Hence, a drastic step was taken, where the OPR was slashed by a cumulative 100 basis points in four rounds to a record low of 1.75%, to support the economy during those extremely troubling times. This rate was maintained from July 2020 until May 2022.

Prior to that, the rate was maintained at 3% from May 2019 until it was reduced to 2.75% in January 2020 as a pre-emptive measure to sustain growth.

This was in the wake of external uncertainties and risks from trade negotiations, geopolitical tensions, and heightened volatility in financial markets, as well as downside risks to the domestic economy stemming from local factors.

However, the rate has since been increased by 125 basis points since May 2022 through five rounds of OPR hikes.

Now that the economy has fully reopened, the increase was more or less expected.

Although many observers were caught by surprise by the increase in the last round, the MPC decided to maintain the OPR during the January and March meetings in 2023.

So what else does the OPR do?

It helps to improve the value of the ringgit.

Dr Mohd Afzanizam also said that this will also mean that investing in ringgit assets will provide competitive returns.

“It will benefit the economy in a number of ways. First, it will benefit depositors who would want to save their money in a bank.

“Deposits in a bank are also a form of asset class in investment. So those who have excess cash and would like to save their money can do so by keeping their money in a fixed deposit. Some banks can offer very attractive rates, and the main factor that affects the deposit rates is OPR,” he explains.

Second, rising OPR would mean the Bank Negara would increase their policy space.

This simply means that Bank Negara can always cut the OPR when the situation warrants such action, in particular during a weak economy. Typically, the OPR will be reduced during a recession.

“A larger policy space indicates Bank Negara is ready to face any challenges that can affect the growth momentum,” said Dr Mohd Afzanizam.

He says it is important to understand that the OPR is not fixed, and Malaysians should be cognisant of its implications.

“This can also be deemed financial literacy, as we will know the reason for the change in OPR. Such knowledge will lead us to make an informed decision, especially on things that relate to personal finance,” he says.

There is no denying that financial literacy is important. It also helps in understanding and planning ahead for how these factors can impact our financial commitments.

Whether it was a merciless move or not, it is best for an individual to decide based on his or her experience.

Most importantly, the OPR must not be turned into a political sound bite.