How does a change in the Overnight Policy Rate (OPR) affect your financial standing? What risks and factors should you be aware? Gain insights on the financial benefits and gains.
What is the OPR and the Latest Change?
The Overnight Policy Rate (OPR) is the overnight interest rate set by Bank Negara Malaysia (BNM). The rate can and does change over time, often as a tool used by central banks to shape the economic narrative. Reducing the OPR will reduce the cost of borrowing for banks and will lead to a chain effect affecting both companies and individuals.
OPR changes by central banks are watched closely by many especially for major economies like the United States. The US Federal Reserve’s (Fed) moves are watched and anticipated for potential changes and even the words used are analysed and help shape the narrative on whether the central bank is dovish or hawkish.
Hawkish: likely to tighten economic policy, raise rates, and prevent economy from overheating
Dovish: likely to accommodate monetary policy, reduce rates, and stimulate the economy.
In Malaysia, the Monetary Policy Committee (MPC) of BNM decided to reduce the OPR to 3% on May 7th. It is the first cut since July 2016 and the 1st in South East Asia (SEA) to do so. The ceiling and floor rates for Malaysia’s OPR are correspondingly reduced to 3.25% and 2.75% respectively. Maybank has been the first to correspondingly lower their rates with the Base Rate (BR) lowered by 20 basis points (bp) from 3.25% to 3.05% and Base Lending Rate (BLR) from 6.90% to 6.70%.
OPR Cut Effect on Economy and Business
Economy: The rate cut is with the intention to boost spending, reduce deflation (with a reduction in the price of goods) and boost the overall Malaysian economy.
Business: Generally positive as most businesses will fare better with lower borrowing costs and increased domestic consumer spending. Sectors that will benefit positively include property, construction, discretionary goods, and exporters.
The exceptions would be banks (see below) and importers that will now need to pay more to bring in goods with a weaker Ringgit.
Banks: Reduced profitability with lower interest rates and thus profits reduced. The impact on banks net profit is expected to be around -3%.
OPR Cut Effect on Individuals
How does this affect you and I as individuals and for the average Malaysian?
Fixed Deposits: Lower returns for fixed deposits that have not been locked-in prior. If you have funds to place in a fixed deposit, you will want to do so before banks revise rates.
Equities: Generally a boost for equity markets as most companies perform better with lower borrowing costs (except the inverse for banks) and increased spending by consumers. The equities market is a leading indicator meaning that its effect will be seen faster than the economy.
Bonds: Generally fixed rate bonds will increase in value as bonds become more attractive when interest rates drop. In short, bonds have an inverse relation with interest rates meaning bond prices go up when rates go down (and vice versa). This affects long-term bonds more than short-term bonds as there is a longer coupon payment duration affected.
Property Loans: Variable rate loans including home mortgages interest rate will go down in tandem. Property loan repayments will reduce approximately RM10 monthly for every RM100,000 in loan amount. (Tip: check out our loan calculator).
Currency: The Ringgit is expected to weaken with the rate cut due to lower yield and capital outflow. Foreign funds may move money out of Malaysia to invest in other countries. Worries remain for the Ringgit especially on fears it will further accelerate the decline versus the US Dollar.
The rate cut was expected albeit earlier than most predictions. BNM’s intention to “preserve the degree of monetary accommodativeness” and “support a steady growth path” is viewed positively. The overall boost to the economy, reduced loan payments, and increased consumer spending power may be just what Malaysia needs in the current times of global growth worries.