One of the key rationales given by those defending Bank Negara Malaysia or BNM’s surprise increase in the overnight policy rate (OPR) by 25 basis points (bps) to 3%, collapsed when the ringgit depreciated against the US dollar below the announcement of the rate hike. The OPR hike of 0.25% was supposed to help boost the strength of the ringgit against the US dollar.
In less than 10 days, the ringgit has depreciated from RM 4.45 to the US dollar on the day of the OPR hike of 0.25% on 3 May to RM 4.47 today. Clearly the value of the ringgit is not determined by sound economic fundamentals, solid economic performance, growth rates or OPR set by BNM but more a function of interest rate expectations of the US Federal Reserve.
This is clearly demonstrated during the two interest rate pauses by Bank Negara this year, which did not jeopardise the value of the ringgit but instead appreciated to RM4.24 to the US dollar on 28 January 2023. The ringgit can still strengthen to the January levels when interest rate hikes by the Federal Reserve hits a pause, thereby allowing the performance of key fundamentals of the Malaysian economy to come into play.
The other acceptable rationale for an OPR hike is to contain inflation. However, inflation fell from 3.7% in February 2023 to 3.4% in March 2023, negating the need to raise the OPR when inflation is being reined in. The 3.4% inflation rate for March is a 34-month low, making the OPR hike so unexpected. This sentiment is reflected by most economists.
A poll of 19 economists by Bloomberg found that 16 expected the OPR to remain with only 3 predicting an OPR hike whilst a poll of 25 economists by Reuters found that 21 expected the OPR to be maintained with only 4 predicting an OPR hike. This nasty surprise of an OPR hike will be felt most by bank borrowers, especially individuals with vehicle, home, and credit cards as well as SMEs bearing a heavier financial burden.
Apart from borrowers, the economy may also suffer with a higher interest rate affecting economic growth already affected by global uncertainties of a US-led global recession. According to S&P Global Market Intelligence, the seasonally adjusted Malaysia Manufacturing Purchasing Managers’ Index (PMI) remained below the 50-point mark separating monthly expansion and contraction, with the index unchanged at 48.8 in April 2023. This is a warning signal of a subdued Malaysian manufacturing sector at the start of the second quarter of this year amid a challenging economic environment. The surprise hike in the OPR by Bank Negara definitely does not help to boost business confidence.