DAP urges Bank Negara Malaysia(BNM) not to hike up its overnight policy rate(OPR) by 25 basis points from 2.25 % to 2.5 % expected by this week, purportedly to stem soaring prices and inflation coupled with arresting the decline of a rapidly depreciating ringgit. Bank Negara’s previous efforts in increasing the OPR appear to have no effect on the inflation rate with the consumer price index rising by 4.4% in July compared to 3.4% in June 2022.
Raising interest rates has no effect on rising prices, principally because this is not caused by excessive demand(demand pull inflation), so hiking the OPR would not reduce demand. Global inflation is cost-push, caused by supply chain disruptions as a result of sanctions imposed following the Ukraine war and the COVID-19 lockdowns in China.
Hiking up the OPR would also be a slap in the face by Bank Negara on Annuar Musa, the Chairman of the Jihad On Inflation Special Cabinet Committee, who claimed that inflation and soaring food prices is slowly under control. Neither has increasing the OPR made any positive impact on supporting our ringgit in the currency market.
The ringgit is approaching a 24 year low of RM4.50 to the US dollar, dipped to a historic low by breaching RM3.25 to the Singapore dollar and the Indonesian rupiah has strengthened by 3% this year against the ringgit. If the purpose of the expected 25 basis points hike is to shore up the value of the ringgit against the US dollar, this is an exercise in futility as Bank Negara can never compete against the more aggressive interest rate hikes by the US Federal Reserve.
Instead of curbing inflation and the decline in the value of the ringgit, hiking up the OPR would adversely affect the people’s socio-economic wellbeing, the domestic investment climate and the country’s post-pandemic economic growth facing pressure from rising prices. Increasing interest rates would unnecessarily add on to the costs of individual loans on houses and vehicles, business costs, cash flows of traders and cost of funds of investors. Bank Negara and the government should be helping businesses not harming businesses, especially SMEs, struggling to survive and revive their business in the difficult post-Covid economic environment.