Bank Negara Malaysia (BNM), the central bank of Malaysia, has increased the Overnight Policy Rate (OPR) by 0.25% in response to the current economic climate. The OPR is the interest rate at which banks can lend or borrow money on an overnight basis and influences the cost of credit in the economy, impacting borrowing and lending rates for commercial banks. BNM determines the OPR based on various factors such as inflation, economic growth, and external economic conditions, enabling it to adjust credit conditions and influence lending practices.
This recent increase in the OPR is deemed necessary by some parties due to the ongoing global recession and rising inflation rates. There were four OPR hikes in 2022, and this is the first hike in 2023. The decision seems to be in line with the US Federal Reserve's policy, which has increased interest rates several times this year while BNM has kept rates steady.
The increase in OPR aims to control inflation, as seen in many countries during the global recession. This rise may have been deemed necessary, basing on the survey conducted by Ernst and Young, given that the top 55% of CEOs in the US predicted a global recession, leading to a rise in inflation rates. Additionally, before the pandemic, the OPR rate stood at 3.25%, while it currently stands at 2.75%, with two more rate hikes expected this year.
Past experiences of countries such as India and Indonesia have shown that central banks must carefully consider the potential impact of OPR hikes on different sectors of the economy. For example, India experienced a sharp increase in borrowing costs after its central bank hiked interest rates in 2013, which resulted in a slowdown in economic growth. Indonesia raised its interest rates in 2018 to tackle inflation, but the move caused a decline in consumer spending, affecting small and medium-sized enterprises (SMEs). In contrast, Singapore raised its interest rates in 2018 to manage inflation and promote sustainable economic growth, with no significant impact on borrowing costs or consumer spending.
The OPR hike is expected to impact private sector employees and traders who borrow from banks based on floating rates, such as home loans and ASB loans. However, civil servants who borrow home loans from the Housing Loan Organisation (LPPSA) will not be affected. This move is also expected to strengthen the Malaysian Ringgit, as 60% of the country's food items are imported, requiring an exchange rate of USD to MYR.
This OPR hike might be deemed a necessary step towards stabilizing inflation rates and promoting economic growth in Malaysia. While it may impact certain sectors, it is commonly recognised as a prudent measure that will ensure long-term economic stability. This move might also encourage responsible borrowing and lending practices, leading to a more sustainable and stable financial system. In due hope that with this proactive approach, Malaysia will be able to face the challenges posed by the global recession, and this in turn will contribute towards a brighter economic future for the country.
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