LETTERS: The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to increase the overnight policy rate (OPR) by 25 basis points to two per cent at its meeting on May 11.
Bank Negara said it will be done carefully and periodically to support the country's growth while it undergoes price stabilisation.
Despite an OPR application being perceived as a normal transfer and cash-flow trick, today's loan requirements and cash-loan payments are important for the macro-financial system to function smoothly.
In fact, it even affects the loan's interest rate.
The higher the OPR, the higher the cost of borrowing. The higher the cost of borrowing, the fewer capital financing opportunities for people and businesses.
Hence, the harder it is to borrow, the fewer the activities that will be carried out as there will not be any capital.
This means bank loan interest rates will increase and affect the B40 and M40 groups.
When the OPR goes up, monthly instalment payments to banks will go up, eligibility for new loans will be tightened and repayments for the purchase of a house, car or personal loan will go up.
On the other hand, a reduction of OPR will have a positive effect on capital ownership, reducing the interest payments for people and businesses to banks, resulting in more people being able to access loans.
However, Bank Negara's move to start raising the OPR benchmark is seen as having the potential to reduce the significant increase in inflation or commodity prices, as well as strengthen the ringgit against the US dollar as evident in January 2018.
When the OPR increased the price of goods and services, the Consumer Price Index decreased to 2.7 per cent year on year compared with 3.6 per cent previously.
In addition, the increase in OPR is expected to drive foreign capital inflows into Malaysia after the country's bond market recorded a net foreign inflow of RM4.5 billion and foreign local equity investors became net buyers of RM3.4 billion in January 2018. Raising the OPR does not mean not pitying the people.
Since the pandemic, Bank Negara has lowered the OPR by five times, from 3.25 per cent to 1.75 per cent.
This means more people can seek approval for bank loans because of the low interest rates.
The OPR was lowered during the pandemic so that surplus money that should have been paid to banks could be used by the people to move the economy at the grassroots level.
Bank Negara's decision was deemed unpopular but economists have predicted that the value of OPR will be raised again this year.
DR PAUL ANTHONY MARIADAS,
DR UMA MURTHY
Lecturers for the School of Accounting and Finance,
Faculty of Business and Law, Taylor's University
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times