KUCHING: Bank Negara Malaysia (BNM) has raised the Overnight Policy Rate (OPR) to address inflation concerns, contradicting claims that higher OPR would increase the cost of living.
Centre for Market Education (CME) economist Dr. Carmelo Ferlito explained that inflation occurs when the quantity of money in circulation grows faster than the output (Gross Domestic Product).
The lockdowns enforced by governments forced them into expansive fiscal policies, and central banks were compelled to keep interest rates artificially low.
“We predicted it, led by inflation post-Covid as early as May 2021. We were able to foresee it without the need for sophisticated economic models,” said Ferlito.
He argued that while increasing the OPR will be painful, it is necessary to reduce the quantity of money in circulation and restore people’s purchasing power.
He added that raising OPR alone is insufficient arguing that government spending must be cut, market prices restored and balanced budgets must be prioritised.
According to Ferlito, the impact of OPR changes on the economy is not automatic and depends on market actors’ interpretation of BNM’s decisions.
Addressing concerns that the increase in OPR may lead to higher rents and goods prices, Ferlito said this reasoning is completely misleading.
Rents will not be affected, and loans will be impacted in a non-uniform way with different timings according to different banks.
BNM aims to bring down prices, so increasing borrowing costs can be met by lower general prices.
As a result, the concept of a domino effect, where one price increase leads to another, does not apply in this situation.
The slowdown in economic activity is an unavoidable consequence of previous lockdown policies, not the OPR increase.
“What undermined the purchasing power of people is not the OPR but inflation,” Ferlito stressed.
“Raising the OPR is an attempt to put prices back under control and therefore, safeguard purchasing power.”
Last Wednesday, the central bank increased the OPR by 0.25 per cent, bringing it to its highest level since 2020 at 3 per cent.
