KUCHING: Bank Negara Malaysia has announced its decision to maintain the Overnight Policy Rate (OPR) at 2.75 per cent, citing concerns over a possible global economic slowdown that could lead to a recession.
Universiti Malaysia Sarawak (UNIMAS) economist Jerome Kueh said that “maintaining the OPR for the time being is crucial to provide space for the businesses and households to accommodate the impact of the possibility of occurrence of global recession”.
According to the International Monetary Fund (IMF), the global growth is estimated to shrink from 3.4 per cent in 2022 to 2.9 per cent in 2023 due to the tightening monetary policy by central banks in advanced countries to combat inflation and easing energy cost that may put the risk of experiencing recession.
Kueh opined that “the root cause for the higher price of goods and services in the market is due to global supply chain disturbance, instead of due to aggregate demand increase”.
He went on to explain that “any rise in interest rate may indirectly cause production cost to escalate and eventually may burden the households due to lower purchasing power”.
While increasing the interest rate is an option to address the high cost of living, Kueh believed that an OPR hike at the moment may not be able to tackle the inflation issue thoroughly.
“Maintaining the OPR is necessary to accommodate the prospect growth in the country and also at regional level,” said Kueh in an interview yesterday.
He pointed to new potential investments in the country, such as Amazon Web Services and Tesla, and the expected increase in tourist arrivals as reasons for a steady monetary policy.
“Just like adapting to a new pair of shoes, it takes time for market agents, notably businesses and households, to adjust to a previous OPR condition.
A sudden increase in the rate, however, may cause them to stumble and realign, despite the current efforts to address inflationary pressures.”
“BNM is now making decisions more independently by closely examining domestic economic factors, as well as the cooling down of inflation and the evolving economic situation, which include the possibility of a global downturn,” said Centre for Market Education (CME) economist Carmelo Ferlito.
“This approach has allowed the central bank to strike a balance between an accommodative approach and the issue of inflation,” he added.
Ferlito also said that despite the true scale of inflation being obscured by persistent price controls and subsidies, the current official inflation data has led BNM to be cautious about raising interest rates further.
He asserted that implementing a “serious strategy to combat the lingering inflation pressures found within core inflation will require a multifaceted approach”, which includes measures such as “reducing government spending, pursuing balanced budgets, promoting savings, and enhancing productivity”.
“While noting that BNM is taking a balanced approach, we should be cautious not to overestimate the role of monetary policy in combating inflation and promoting growth,” said Ferlito.
Instead, he added a pro-growth strategy should be carefully planned, centred on the mutually reinforcing relationship between investment and savings, with a measured and deliberate approach.
“I see International Trade and Industry (MITI) Minister Tengku Zafrul Aziz’s recent recognition of this relationship as a positive step in the right direction,” he concluded.
The OPR is the benchmark interest rate used by BNM to influence the lending, financing, and deposit rates of banks, including both conventional financial products and Islamic finance.
When the OPR changes, it directly affects the cost of bank loans and deposit returns.
To illustrate, my back-of-theenvelope calculation showed that an increase of 0.25 per cent in the OPR would result in higher monthly instalment payments for a borrower, such as in the case of a RM500,000 home loan with a 30-year term, where the monthly payment would increase by RM71.
Over the course of the loan, the borrower would pay an additional RM25,560 in total interest. If the OPR increases by 0.75 per cent, many individuals and households will be affected in terms of managing their expenses for food, utilities, and education.
But on the upside, an increase in interest rate will also encourage more people to invest and save in fixed deposits, to take advantage of the higher interest returns.
BNM announced on Thursday that it would maintain the OPR at 2.75 per cent following a meeting of its Monetary Policy Committee (MPC).
This marks the second consecutive pause in the OPR after the central bank surprised the market in January by keeping the rate at 2.75 per cent since Nov 3, 2022. Next MPC meeting will be held on May 3, 2023.
