KUALA LUMPUR: Malaysians are bracing for higher borrowing costs after Bank Negara Malaysia increases its Overnight Policy Rate (OPR) by 25 basis points (bps) on Thursday.
It was the fourth consecutive 25bps hike this year since May, with the latest one pushing the OPR to 2.75 per cent.
Economists expect more interest rate hikes next year, as early as January, if the central bank feels price pressures need to be contained further.
Universiti Kuala Lumpur Business School economic analyst Associate Professor Aimi Zulhazmi Abdul Rashid said the higher OPR would lead to higher financing cost but also higher savings rate.
"For those who invest using borrowed funds, they may not pursue further, hence reducing participation in the stock market.
"Those who invest from savings may reduce their portfolio in the equity market and switch to US dollar-denominated funds overseas or keep their deposit in the banks for higher deposit rates, and comparatively lower risk to investing in stock markets," Aimi Zulhazmi told the New Straits Times.
He said the United States Federal Reserve's (US Fed) move to raise interest rates by another 0.75 per cent on Wednesday would result in more funds being transferred to the US, thus strengthening the dollar against most currencies including the ringgit.
"Nonetheless the increase in OPR would not stop the ringgit from declining and the equity market dropping. The measures taken by Bank Negara were in tandem with other central banks globally," he said.
Bank Negara said with the rise in OPR, the ceiling and floor rates of the corridor of the OPR were correspondingly increased to 3.00 per cent and 2.50 per cent respectively.
The central bank said it had decided to further adjust the degree of monetary accommodation against the backdrop of continued positive growth prospects for the Malaysian economy.
"The adjustment would also preemptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth," it said in a statement.
Putra Business School associate professor Dr Ahmed Razman Abdul Latif felt the higher interest rates would not have a significant impact on the stock market as the current level was still lower than the pre-pandemic rate of 3.25 per cent.
"We are aware that foreign investors had already exited our stock market and moved towards the US because investment returns are higher than our local stock market.
"Therefore 2.75 per cent of OPR will not slow down the economic activities significantly as the current demand is still strong with consumers and businesses spending still on the rise," he said.
He said there was a possibility for the central bank's Monetary Policy Committee to further increase the OPR next year given that it had to catch up with the aggressive rate hikes taken by the US Fed.
Further increase in the OPR would also protect the ringgit from further against the greenback.
"The US Fed has been quite aggressive in its rate hikes whereas Bank Negara has done gradual increases.
"There's a lot of catching up needed to be done by Bank Negara to protect the ringgit because when the US Fed aggressively increased the rate, it made the US dollar even stronger.
"Therefore, there is a possibility of further gradual increase in OPR next year," he added.