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Economists tell who will feel the pinch if OPR is raised again

Nevertheless, they say the current overnight policy rate of 2.25% is still manageable compared to the 3.25% seen in 2019.

Azzman Abdul Jamal
3 minute read
A woman crosses a pedestrian bridge after work in the Kuala Lumpur city centre.
A woman crosses a pedestrian bridge after work in the Kuala Lumpur city centre.

Malaysians can expect an increase in loan costs if Bank Negara Malaysia (BNM) continues to raise the overnight policy rate (OPR) in the months to come, economists say. 

Speaking to MalaysiaNow, they said any increase would affect the low- and middle-income groups in particular, as bank loan payments, especially for home loans, would rise in tandem.  

At the height of the Covid-19 pandemic in July 2020, BNM reduced the OPR to 1.75% – Malaysia's lowest level ever. It maintained this level until May 11 this year, when it raised the OPR by 25 basis points or 0.25% to 2.00%.

On July 6, the central bank raised the OPR again by another 25 basis points to 2.25%.

Economist Barjoyai Badai said borrowers could still manage the latest increase as 2.25% was much lower than the 3.25% recorded in 2019. 

He said many economists also expected BNM to continue increasing the OPR as part of its strategy to tackle inflation, in line with the country's economic recovery. 

For himself, he expects no less than three more increases to come. 

"Right now, the economy is improving. When this happens, the liquidity in the market will increase and, if not controlled, will cause widespread inflation," he said. 

"The central bank will use its monetary instruments to alleviate market liquidity and reduce demand pressure."

Many had questioned BNM's decision to raise the OPR rate despite Malaysia's inflation ranking among the lowest in the world at 2.8%.

Last month, economic affairs minister Mustapha Mohamed attributed Malaysia's inflation rate to the broad-based subsidies provided by the government and its move to stabilise the price of goods. 

He also warned that the inflation rate could hit 11.4% if these subsidies were removed. 

Ahmed Razman Abdul Latiff of Putra Business School said price pressures could be expected to continue throughout the next few months, citing factors such as the ongoing crisis in Ukraine and the lifting of movement restrictions in China which he said would spur the country's economic recovery. 

"These are some of the factors that will put pressure on local goods and bring about the need for further hikes in OPR. 

"The OPR rate is still low compared to 2019, so there is still space to raise it some more," he said, adding that this would have its pros and cons. 

For example, he said, the cost of financing would increase while individual and business spending would decrease. However, it might also encourage more savings in banks due to the higher monthly interest rates.  

When spending drops, he said, the demand for goods also declines which could lead to a decrease in the price of goods. 

"But on the other hand, if OPR hikes are implemented on a continuous basis, it could burden the people with higher monthly commitments," he said. 

"Among the most affected will be those who have home loans. Car loans will not be affected." 

For example, Barjoyai said, if the interest rate is increased by 25 basis points, instalments for a RM200,000 loan will increase by RM60 per month. 

Given the last two increases in May and July, he said, loan repayments in this case would rise by RM120. 

"But there is a way to avoid this," he added. 

"Those who take home loans through the Islamic financial system can avoid such increases as the system will lock in at a pre-determined rate when the loan is made." 

When asked about any effect that OPR hikes might have on house prices or rental, Barjoyai said these would depend more on demand and supply.

"When demand goes down, house prices and rental will go down too," he said. 

"If house owners raise their rental fees, of course they will lose their tenants. The same goes for house prices – if they go up, buyers might not want to buy."