PETALING JAYA: Bank Negara Malaysia’s (BNM) move to raise the overnight policy rate (OPR) by 25 basis points (bps) to 3% following its Monetary Policy Committee (MPC) meeting on Wednesday is aimed at tackling inflation, said economists.
They said while the higher OPR would cause households to reduce consumption to cover increased loan repayments and the higher the cost of living, prices of goods would gradually fall, thus reducing inflation.
Sunway University economist Prof Dr Yeah Kim Leng said the basic premise for the higher rate is to tackle core inflation, that is affecting the country.
“Inflation is currently still strong. But the higher interest rate will help reduce inflation and provide some insurance against it going up.
“At the individual level, those who have loans will have to fork out a higher amount in monthly repayments, but they will manage this by cutting down on spending in other areas, leading to reduced demand for goods.
“On the other hand, those who have savings will gain from higher returns as banks will increase the interest rate on savings.”
Yeah said at the national level, BNM, which is supportive of growth, has returned the interest rates to the pre-pandemic level.
To deal with the higher cost of living, he said households will have to rebalance their budget by reducing spending to service their monthly loan repayments.
Yeah said BNM’s small increase in the OPR will allow households to gradually adapt to their indebtedness.
He stressed that while the reduction in spending power will dampen demand, this will put pressure on the prices of goods and services, which will have to come down due to the forces of supply and demand.
“The man in the street will find this hard to understand as he sees his spending power diminish. But in the long term, as prices fall, people will have more money to spend as they pay less for goods and services.
“There will be no price pressure on goods as demand falls,” he said.
In revising the OPR, BNM said with the domestic growth prospects remaining resilient, the MPC judges that it is time to further normalise the degree of monetary accommodation.
With this decision, the MPC has withdrawn the monetary stimulus intended to address the Covid-19 crisis and promote economic recovery.
“In light of the continued strength of the economy, the MPC recognises the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances,” BNM said.
It added that the monetary policy stance is “slightly accommodative and remains supportive of the economy”.
Universiti Tun Abdul Razak economist Dr Barjoyai Bardai said the overall impact of the higher interest rate will be reflected in the cost of doing business.
He said the government wants manufacturers to ramp up production as their operating costs will rise in tandem with the higher interest rate.
“Manufacturers are presently slow to increase production although demand for goods is high. Higher production volumes will eventually force prices to fall as household demand for goods slows down due to lower consumption to cover higher monthly loan repayments.
“Malaysia’s gross domestic product (GDP) growth has been consumption-driven, which resulted in higher inflation. Manufacturers have failed to keep up with demand, thus forcing the prices of goods to rise.”
Barjoyai said as the cost of doing business increases, manufacturers will raise production but not prices as they need consumers to purchase their products. This will result in lower prices.
“Current household borrowings are 85% of GDP. A higher OPR will discourage new borrowings, thus reducing the household debt level.”
