Understanding Overnight Policy Rate

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The Overnight Policy Rate (OPR) is a policy interest rate by Bank Negara Malaysia (BNM) that influences banks’ lending and financing rate as well as deposit rates. OPR is decided by BNM’s Monetary Policy Committee (MPC) as per Central Bank of Malaysia Act (2009). The MPC is also responsible for other monetary policies or operations. 

As the Central Bank, BNM is tasked to provide a suitable condition for sustainable growth of the Malaysian economy. In order to do this, MPC needs to set a monetary policy that could keep inflation low and stable while supporting economic growth. How MPC does this is by changing the OPR, depending on the country’s economic growth.

How does it affect you?

Any movement of the OPR can both directly or indirectly affect you. As explained before, changes in the OPR will influence the interest rates of all loans and deposit rates. As such, you will be directly affected if you have any adjustable or variable loans with the banks. However, if you have a fixed rate loan or zero loan for that matter, you won’t be directly affected but you will still feel the heat. 

This is because the majority of businesses in the world have debts with the banks. With the rise of OPR, business operating costs are expected to rise, thus impacting the end product users. Now, this all seems like there are more disadvantages for the people, making you think why OPR must be increased? 

Main Reason of OPR Changes – Achieving Sustainability

As the OPR rises, the higher interest rates on savings and loans will influence people to save more and spend less. In a simple supply and demand situation, prices of goods will rise when demands exceed supply, which typically happens when people have more money to spend. Higher OPR will help to slow demand down. Following that, demand will stabilise with the supply, resulting in a slower increase of price of goods. 

The opposite happens when the OPR is reduced. Lower interest rates on loans and savings provide a financial cushion as people will save less and spend more. This in turns, spurs economic activity and prevents a situation of falling price levels due to weak demand, which could hurt the economy. 

Too low too long harms the economy

Economic growth has always been the benchmark to measure how developed a nation is. The size of an economy is measured by the Gross Domestic Products (GDP). However, constant growth does not necessarily mean it is a good thing. 

For some, it may appear to be like a good idea to raise the economy as much as they can in a day. But just like how runners sprint early in a marathon and end up being unable to finish a race, uncontrollable economic growth in a short period of time could also cause a country to face extreme rise of inflation. As a result, the people would be left poorer and will have to face the cost. 

This is why having sustainable growth is vital, so as to help temper such economic boom and avoid any growth to crash down in the future.

OPR changes over the years

OPR Changes from 2004 – 2023

The OPR, which was first introduced in 2004, has been through many ups and downs. It was at its highest in April 2006 when it was at 3.50% and lowest during the Covid-19 global pandemic when it was reduced to just 1.75%. It was also greatly reduced during the 2009 Global Financial Crisis in 2009 when it was lowered to 2.00%. 

The graph above shows the movement of the OPR, which has always been adjusted based on what the economy needs. In tough times, such as in the periods of 2008-2010 and 2020-2022, OPR was reduced to promote spending, boost investment, reduce unemployment and mitigate inflation as well as the financial impacts during the times of crisis. 

Fortunately for us, the country is no longer facing an economic crisis as the economy has been steadily improving. 

For more info on the OPR or BNM’s monetary policy, visit https://www.bnm.gov.my/monetary-stability#mpfaq

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  • Ejon Zayn

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