Although many predicted that the Overnight Policy Rate (OPR) will remain, things turned otherwise when Bank Negara Malaysia (BNM) announced the reduction of OPR to 3%. The cut was determined and announced on July 13, following its Monetary Policy Committee (MPC) meeting held on the same day.
This news shocked many, as this is the first reduction in seven years. If you want to know why OPR reduction is the best thing that happened to Malaysians in 2016, here’s why…
BNM & MPC meeting
The BNM (also known as the Central Bank of Malaysia) is a statutory body which commenced in the year 1959 and is regulated by the Central Bank of Malaysia Act 2009. The BNM’s role includes promoting monetary and financial stability while maintaining a conducive environment for the sustainable growth of our economy.
Meanwhile, Monetary Policy Committee (MPC) meeting is held six times a year to discuss the potential risks Malaysia is facing and the necessity to reduce, maintain or increase the OPR. This meeting is be held in January, March, May, July, September and November each year.
What is an Overnight Policy Rate?
The Overnight Policy Rate is the interest rate set by Bank Negara Malaysia, which will be charged by the lending bank to its borrower bank for the borrowed funds.
A bank’s resources fluctuate daily, depending on activities such as withdrawal and deposit by customers. Banks lend as many funds as possible each day as that is how a financial institution earns money. But at the end of the business day, the bank might experience a shortage or surplus. As per BNM’s requirement, the banks have to ensure that a certain amount is maintained and stored in the bank on a daily basis.
Banks that experience shortages will borrow short-term funds overnight from the banks that experience surplus or from BNM. This inter-bank funding will be charged with the overnight interest set by the BNM, as to ensure that the banking system remains stable.
Since the OPR is the lowest interest rate of all, it will be charged only between the financial institutions and will not be offered to the customers. The increase or decrease in OPR will affect the cost of borrowings for banks, which will eventually lead to a chain effect.
In 2016, the OPR was reduced from 3.25% to 3%, with the reduction of 25 basis points. This is the first reduction in seven years, as the previous cut was made in the year 2009. In 2009, the OPR was reduced to a historic low of 2% and was raised again in the year 2010 to 2.75%.
In 2011, the rate was increased again to 3% and was maintained till the year 2013. Meanwhile, from the year 2014 to 2015, the rate was set at 3.25%. Prior to 2009, the OPR was set at a historical high of 8.25% in the year 1998 during the recession and dropped drastically in the year 1999 to 3.25%.
Meanwhile, the ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25% and 2.75% respectively.
Reason for the reduction
The main reason for the reduction was due to uncertainties in the global market, which can negatively impact our country. This can correlate directly to Britain’s exit from the European Union, also known as Brexit.
Brexit has put the global market in jeopardy and Bank Negara Malaysia had to take necessary action to protect our country from external risks.
How it affects the citizens?
The changes in OPR will influence other vital things which give direct impact to ordinary citizens, which will help them cope with the high cost of living. This includes loan interest, fixed deposit interests, saving interest and more.
Besides reducing the burden, this move is also expected to give a boost to our economy.
1. Inflation
The reduction in OPR is also foreseen to lower the inflation this year. Previously, the prediction of inflation was set between 2.5% to 3.5%, but is now revised to 2% to 3%. This reduction will only cause minor differences and will not have a big impact in prevention of inflation.
2. Base Rate (BR) and Base Lending Rate (BLR)
The changes in OPR will directly influence floating rate loans, where the banks will adjust their lending rates by a similar quantum. As an example, buyers will see a reduction in their monthly payment if the bank decides to reduce the Base Rate by 0.25%. This will increase buyers spending capacity.
A few days after the announcement, Maybank reduced its interest rate by 20 basis points, whereby its current BR of 3.20% was lowered to 3% and the current BLR of 6.85% was reduced to 6.65%. Meanwhile, CIMB Bank reduced 20 basis points as well. Reducing its BR to 3.90% from 4.10% and BLR to 6.75% from 6.95%.
With this, the interest rate for existing floating rate loans will be adjusted accordingly. And the new loans will follow the current rates. Buyers will have to fork out a lower monthly pay to service their mortgage loans as compared to before and if the rate is maintained, their savings will be higher in a long run.
3. Savings and fixed deposits
The OPR cut is however not such good news for the public who have high savings and fixed deposits. This is because the interest rates on these accounts will be reduced as well. The public can be getting a lower interest rate as compared to before, as the banks may be reducing the given interests from 20 to 25 basis points. Hence, interest earnings will drop.
4. Other loans
Other loans such as hire purchase loans (Eg: Variable rate car loans), personal loans and credit cards will also benefit from the OPR reduction, as the banks will proceed to reduce the interest rate soonest possible. The rate of reduction can differ from bank to bank. But no matter how much the reduction is, the public will definitely benefit from it.
5. Malaysian real estate investment trusts (M-REITs)
The Malaysian real estate investment trusts have seen improvement following the OPR reduction, as it will lead to lower interest payments. The cut guarantees more savings and a larger disposable income for consumers, enabling them to increase their investment.
6. Stronger currency – Ringgit Malaysia (RM)
After the announcement of the OPR cut, the Malaysian Ringgit has shown improvement against numerous major currencies in the world. RM strengthened against US Dollar, Singapore Dollar, Yen and British Pounds.
The reduction of the OPR, however, was not beneficial to financial institutions as it adds more pressure to the banks. But the cut seems to be more manageable for certain banks such as Malayan Banking Bhd (Maybank), AMMB Holdings Bhd (AmBank) and Affin Holdings as their fixed rate loans cover almost 30% of their loan portfolios.
Meanwhile, the reduction presents obvious benefits to the public. According to several experts, the reduction can be pointless if a person lacks financial management skills. Heavy expenditures can cause quite a damage even with a lower interest rates. Hence, showing caution in spending is vital.
Further down the road, BNM is predicted to reduce the interest more; but it will follow a wait-and-see approach before announcing the next cut.
Images: Sourced from loanstreet.com.my, museumbnm.gov.my, freemalaysiatoday.com and poskod.my
Mangalesri Chandrasekaran, Editor at PropertyGuru, edited this story. To contact her about this or other stories email mangales@propertyguru.com.my
