What is OPR and how does it affect us?

Bank Negara Malaysia (BNM), Malaysia’s central bank, has recently announced an increase in overnight policy rate (OPR) by 25 basis points from 2.25% to 2.5%.

One of the main roles of BNM is to ensure monetary stability. To achieve this goal, the Monetary Policy Committee (MPC) within BNM utilizes monetary policy by setting OPR to affect the interest rates in the economy. OPR is the interest rate at which financial institutions lend funds to each other overnight.

When the OPR is lowered, the interest rate on loans and savings will decrease, encouraging more consumer spending to stimulate economic growth.

Likewise, when the OPR is raised, the interest rate on loans and savings increase. This makes borrowing more expensive and the returns on savings higher, hence the public is incentivized to reduce spending and increase savings. By lowering excess demand on goods and services, the price pressure will indirectly decrease. Setting the OPR can thus help keep inflation at a low and stable rate.

OPR directly influences the Standardized Based Rate (SBR) as well as Base Rate (BR) and Base Lending Rate (BLR) that moves in accordance with the SBR. For floating-rate loans which are loans where interest rate depends on a reference rate, an increase in OPR may increase the loan installment amount. It may also add onto the burden of small businesses in need of cash flow in their business operation.

In July 2020, BNM set the OPR at a record low of 1.75% to support the recovery of the economy that was largely affected by the Covid-19 pandemic. The OPR remained at 1.75% until May 2022 where it was increased by 25 basis points to 2.00%.

(BNM, 2022)

The recently announced change in OPR to 2.50% for September 2022 is the third increase in a row. BNM said in its Monetary Policy Statement that the transition to endemicity as well as policy measures have contributed to the stronger growth performance for Malaysia in Q2 2022. The MPC noted that they are not on a pre-set tightening course and will continue to evaluate the economic condition.

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About the Author

Yong Kai Qi

Kaiqi is an undergraduate student reading Economics at University of Nottingham Malaysia with an interest in research and writing.

References

https://www.bnm.gov.my