THREE letters — OPR, short for Bank Negara Malaysia's overnight policy rate, which essentially sets the rate of interest for financial institutions — are fast becoming a barometer of pain or pleasure for Malaysians.
By some Pareto logic, OPR has been a pain for 80 per cent of Malaysians and a pleasure for 20 per cent since Bank Negara started raising it from 1.75 per cent in January 2020 to three per cent on May 3. Yet economists in Bank Negara and many outside the institution deem the hike for the last three years necessary to tame inflation. Does a high interest rate tame inflation? Yes and no.
Let's consider them together. Most economists advance their argument thus: higher OPR equals higher loan repayments equals lower consumption equals lower prices of goods equals lower cost of living. But life is more complex than "this-equals-this" linear logic of economics.
Life comes with too many levers. Pull this, others spiral out of control. A country's economy, Malaysia's included, is more than the locus of supply and demand. What the economists fondly call the market is home to manipulation, too. OPR is no instrument for this.
The Domestic Trade and Cost of Living Ministry needs to get more robust as greedy manufacturers get creative with their manipulation. "Shrinkflation" (a combination of shrink and inflation) is the latest trick of reducing the size of the product while maintaining the price. Or worse, shrinking the product and increasing the price.
Many Malaysian manufacturers of biscuits and detergents have been at it for quite a while. The ministry shouldn't wait for consumers to come to them. This is very old school. It should partner with consumer associations around the country to curb such manufactured inflation.
Sending something else wild is a real danger. We do not know if and when Bank Negara is going to hike the OPR again. Except for a couple of economists, every economist who is media savvy said Bank Negara will keep its OPR at 2.75 per cent, after it was last raised on March 9. But it didn't. Conventional wisdom is sometimes a victim of its own logic. A "yes" sometimes needs a "no" to make the thinking muscular.
The two economists weren't exactly laughing all the way to the bank, but they at least proved that being a contrarian has its own reputational dividends. There is one more thing. Surprisingly, none of the economists who made it to the press seemed to be alarmed about the OPR slowing down the economy, thus leading to recession.
How near to the dangerous territory of slow growth is three per cent OPR appears not to be a discussion point. To be fair to Bank Negara and to use its doctor's analogy last advanced in January, it will adjust the dosage of its medicine as the health of the economy improves or fails. But the bad news is that a dose of OPR hike today doesn't immediately bring down inflation.
Like some doctors' tablets, OPR is a slow-release prescription that works many basis points at a time. Bank Negara knows this. The United States' Federal Reserve, which sets the tone for the rest of the central banks to follow, knows this, too. It is still waiting to see the results of its aggressive rate hikes of months past. There is a lesson here: like teachers, economists must know when to spare the rod.