It is not a wise move of the BNM to increase the OPR at this early stage of economy reopening

Bank Negara Malaysia’s decision to increase the Overnight Policy Rate by 25 basis points to 2% comes as a surprise to most economic analysts.

Increase in interest rate will slow down economy. This is fundamental economic principle. At such an early stage of re-opening our economy where we are still a far shot from recovery to the 2019 level, the decision of BNM to increase interest rates will impact negatively on the country’s rate of
economic recovery.

The rationale by BNM for the policy to increase the interest rate is to stabilise prices and control inflation.

While the intention may be noble, but the increase in interest rates at this time will likely not achieve the purpose of price stabilisation as the main reason for our current inflation is due to supply-push factor, not so much as demand-pull factor.

In the last one year, the prices of raw materials have sky-rocketed, including freight charges, fertilizers, animal feeds and building materials. This has led to the overall price increases in all goods, especially food item. The problem was made worse because of a weak Ringgit.

Against this inflationary economic background, the government implemented the new minimum wage rate increasing the minimum wage rate from RM1,200 to RM1,500. With such huge and sudden increase in the wages, it will add on to costs of business while at the same time increase the purchasing power of general consumers. Both have the inflationary effect on price of goods.

Therefore, the Bank Negara Malaysia’s 25 basis point increase in OPR will likely not have its impact on price stabilisation. On the contrary, it will slow down our economy and recovery.

Furthermore, it will directly impact on all borrowers of bank loans, housing loans, business loans, hire purchase agreements and credit card loans. For a housing loan of RM200,000, an increase in 25 basis point will entail an increase of RM500 per annum interest. This increase in OPR will hit on
almost all households.

Bank Negara Malaysia’s latest report shows that the Malaysia’s household debt-to-Gross Domestic Product (GDP) ratio as at December 2021 was 89%. This is extremely high if compared to other neighbouring countries in the region. As at December, 2021, Singapore’s household debt to GDP ratio was 69.7%, Indonesia’s was 17.2 % and Philippines’ was 9.9%.

In layman’s terms, most households in Malaysia has bank loans and thus the increase in OPR means that all these families will have to pay more in their monthly instalments to the banks.

It is thus not a wise move of the BNM to increase the OPR at this early stage of economy reopening. It is slow down economy, increase costs of business and increase the financial pressure of debt repayments for all.

Chong Chieng Jen
DAP Sarawak Chairman
Media statement by Chong Chieng Jen in Kuching on Friday, 13th May 2022