Bank Negara's OPR hike not expected to affect Malaysia's economy, say economists

KUALA LUMPUR: Bank Negara Malaysia's decision to resume its monetary tightening after raising the overnight policy rate (OPR) by 25 basis points (bps) will not have negative effects on the country's economy, said economists.

Malaysia University of Science and Technology economist Dr Geoffrey Williams said the economy is strong and inflation is trending down, thus Bank Negara wants to "normalise" the rate and feels that raising now would not have negative effects. 

Williams said in effect, Bank Negara appears to be saying the change will be neutral because it cannot have positive effects either. 

"This will be difficult to explain because raising rates today will not affect inflation. But, it will affect the cost of borrowing and in turn make the cost of living more difficult for anyone with loans," he told the New Straits Times.

Bank Negara today decided to increase the OPR by 25 bps to three per cent. 

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.25 per cent and 2.75 per cent respectively. 

Williams said the effect is not neutral on borrowers but will have no particular positive effect on inflation. 

It is also unlikely to support growth, he said, adding that banks will be richer as net interest margins improve for them.

"Hopefully this move will not prove to be that important. It appears more that Bank Negara has found a window to 'normalise' interest rate using a very 'fine tuning' approach buy it will have no effect on inflation 

"In our forecast, inflation will hit the level of 3.0 per cent by May, and go below 2.5 per cent in July, so this is not really a forward looking decision and will not change this profile at all," he said. 

Williams said the only positive aspect was that it may strengthen the ringgit to insulate the economy better against higher imported inflation such as the recent uptick in the euro area.

"But this contradicts the Bank Negara mantra that it does not use OPR to influence the exchange rate.

"Another possibility is that they have a good preview on 1Q2023 GDP and they take this opportunity to conclude the normalisation. There should be no need for further rate changes now," he said. 

On the same view, Bank Muamalat Malaysia Bhd head of economics and market analysis Mohd Afzanizam Abdul Rashid said this will not have a negative impact on the economy as it will incentivise the public to save more and money or financing activities to be allocated accordingly. 

"Meaning, risks of excessive indebtedness esp among households will be kept at bay as the cost of borrowings have become more normalised," he said. 

Afzanizam said it is an unexpected move by Bank Negara but not totally beyond Bank Muamalat's anticipation.

"We are projecting for a 25 bps hike in July. It's just the timing from our point of view. Judging from the statement, it seems the OPR at 3.0 per cent is a done deal this year. 

"At 3.0 per cent, Bank Negara has a comfortable policy space for them to use when there is a need to respond to economic shocks. 

"This is especially true when the global growth prospect is likely to be challenging going forward owing to tight global liquidity conditions as well as higher inflation rate," he added.

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