Understanding OPR in Malaysia: Its Impact on You

The overnight policy rate (OPR) is an important part of Malaysia’s monetary policy. It can impact a wide range of important financial measures such as deposit rates, lending rates, foreign exchange rates, and crucially – home loan interest rates.

But what is OPR, and what does it really mean for you when it comes to owning a home?

What Is OPR?

OPR is an overnight interest rate, also known as the key interest rate, set by our central bank, Bank Negara Malaysia (BNM) that determines the rate of interest for financial institutions that lend each other money overnight.

On a day-to-day basis, banks tend to have changing levels of cash reserves, dependent upon the lending activities of the bank, and the deposits and withdrawals of its customers.

That means if everyone decides to take out their money to buy Rihanna tickets on the same day, a bank might a) question how much Rihanna tickets cost and b) need to borrow some money from another bank to keep appropriate cash reserves.

In order to balance the available levels of cash (otherwise known as liquidity), banks with large cash reserves on a particular day often lend to banks with a cash shortfall in order to ensure a stable and liquid banking system.

Think of it like going to the mamak before you realise how hungry you are, and having to borrow cash off a friend. Then you pay them back the next day.

Of course when it comes to monetary policy, it’s a bit more complex than buying yourself a big pile of nasi lemak!

Definition and Purpose

The Overnight Policy Rate (OPR) is a crucial monetary policy tool wielded by Bank Negara Malaysia (BNM), our central bank, to steer the economy towards stability and growth. Think of the OPR as the central bank’s way of setting the tone for interest rates across the country. By adjusting this rate, BNM can influence how much it costs for banks to borrow money overnight, which in turn affects the interest rates that you and I encounter when taking out loans or opening savings accounts.

The primary purpose of the OPR is to control inflation and ensure sustainable economic growth. When inflation is too high, BNM might raise the OPR to make borrowing more expensive, which can help cool down an overheated economy. Conversely, if the economy needs a boost, lowering the OPR can make borrowing cheaper, encouraging spending and investment. In essence, the OPR is a key lever that BNM uses to keep our economy on a steady path.

Role of the Central Bank

Bank Negara Malaysia (BNM) plays a pivotal role in our financial system, and one of its most important tasks is setting the Overnight Policy Rate (OPR). This rate is a cornerstone of BNM’s monetary policy framework, used to regulate the money supply and guide the overall direction of interest rates in the economy.

When BNM adjusts the OPR, it’s not just a random decision. The central bank carefully assesses the growth outlook of the economy, inflation trends, and other macroeconomic factors. For instance, if the economy is growing too quickly and inflation is rising, BNM might increase the OPR to make borrowing more expensive, thereby slowing down economic activity. On the other hand, if the economy is sluggish, a lower OPR can reduce borrowing costs, stimulating spending and investment.

By influencing the OPR, BNM can affect the borrowing costs for households and businesses, which in turn impacts economic activity and inflation. It’s a delicate balancing act, but one that is crucial for maintaining economic stability.

How OPR Works

The Overnight Policy Rate (OPR) is essentially the interest rate at which banks lend money to each other overnight. Imagine it as the rate your friend might charge you for borrowing some cash until you can pay them back the next day. This rate is set by the central bank and serves as a benchmark for other interest rates in the economy.

When Bank Negara Malaysia (BNM) sets the OPR, it sends ripples through the financial system. The OPR influences the base lending rate (BLR), which is the rate banks use as a reference for setting their own interest rates on loans and deposits. This means that changes in the OPR can affect everything from your home loan interest rate to the returns on your fixed deposits.

But the impact of the OPR doesn’t stop there. It also affects foreign exchange rates, long-term interest rates, and the overall amount of money and credit in the economy. For example, a lower OPR can lead to lower borrowing costs, which can boost spending and investment, ultimately affecting employment, output, and the prices of goods and services. It’s a chain reaction that underscores the importance of the OPR in our economic landscape.

Why is the Key Interest Rate (OPR) so Important?

It might seem like clever cash juggling, but the need to lend cash between banks is an established and important part of a well-functioning financial system. Oh, and did we mention that whole home loan interest rates thing?

Banks rely on lending as an important commercial activity, meaning balancing their available cash reserves is vital to meeting the requirements of liquidity set out by BNM.

This is sometimes called a reserve requirement, as in the amount of cash a bank has to hold in reserve. That part at least is easy enough to explain!

Bank interest rates defined by OPR provide the framework for monetary direction on a national level that ensures banks have a stable supply of available cash.

Because the OPR is so fundamental to the workings of our banking system, changes to the OPR rate often have a domino effect on a range of other economic factors beyond simply lending rates.

For example, employment and inflation on the cost of goods. BNM’s goal is to ensure that inflation levels stay manageable, supporting stable economic growth.

Factors Influencing OPR Decisions

When Bank Negara Malaysia (BNM) decides on the Overnight Policy Rate (OPR), it doesn’t do so in a vacuum. Several key factors come into play:

• Inflation: BNM aims to keep inflation within a manageable range. If inflation is rising too quickly, the central bank might increase the OPR to cool things down.

• Economic Growth: The growth outlook of the economy is a major consideration. BNM adjusts the OPR to promote sustainable growth, ensuring the economy doesn’t overheat or stall.

• Market Expectations: The central bank also takes into account what the market expects. Sudden or unexpected changes can cause volatility, so BNM often signals its intentions to manage expectations.

• Resilient Domestic Expenditure: The strength of domestic spending is another factor. If consumers and businesses are spending robustly, BNM might adjust the OPR to ensure this expenditure remains sustainable.

• Higher Export Activity: Increased export activity can boost the economy, and BNM considers this when setting the OPR.

• Interest Rates: The impact of interest rates on borrowing costs and economic activity is a critical factor. BNM aims to set the OPR at a level that balances these costs with economic growth.

• Data: Comprehensive data and analysis inform BNM’s decisions. This includes economic indicators, financial market trends, and other relevant information.

• Banking Sector: The health of the banking sector is also considered. BNM aims to ensure that its decisions support a stable and resilient financial system.

• Customers: Ultimately, BNM’s goal is to promote financial stability and protect the interests of customers, ensuring that the economy remains on a stable footing.

By weighing these factors, BNM makes informed decisions on the OPR, aiming to achieve its monetary policy objectives and promote economic stability.

What Are The Recent Overnight Policy Rate Changes By The Central Bank And Why?

As of May 2024, Bank Negara Malaysia maintained the OPR rate, at 3.00%. As of May 2024, this marks the ninth consecutive meeting where the OPR has been maintained at 3.00%.

For context, these were the last OPR changes announced.

• 9th May 2024 – OPR rate maintained at 3.00%

• 7th March 2024 – OPR rate maintained at 3.00%

• 3rd May 2023 – OPR rate raised by 25bps to 3.00%

• 9th March 2023 — OPR rate maintained at 2.75%

• 19th January 2023 — OPR rate maintained at 2.75%

• 3rd November 2022 — OPR rate raised by 25bps to 2.75%

• 8th September 2022 — OPR rate raised by 25bps to 2.50%

• 6th July 2022 — OPR rate raised by 25bps to 2.25%

• 11th May 2022 — OPR rate raised by 25bps to 2.00%

• 7th July 2020 — OPR rate cut by 25bps to 1.75%, the lowest level on record

• 5th May 2020 — OPR rate cut by 50bps to 2.00%

• 3rd March 2020 — OPR rate cut by 25bps to 2.50%

• 22nd January 2020 — OPR rate cut by 25bps to 2.75%

How Does The Overnight Policy Rate Impact The Housing Sector in Malaysia?

The higher the OPR is set, the more expensive it is to borrow money, affecting the average interest rates on housing loans. The more expensive it is to borrow money, the more limited the affordability of accessing capital becomes for both personal and commercial purposes.

If it costs more to lend, less people can do it. That can have a notable impact on the housing sector.

The other side of that coin is that lowering the OPR has a positive effect on the affordability of capital, reducing interest rates and generally making lending more affordable for more people.

How Does OPR Affect Housing Loans in Malaysia?

When the OPR increases or decreases, so do the interest rates on loans. That can benefit both a large number of existing home loan holders, as well as people looking to access a new home loan for a property purchase.

A reduction in OPR benefits people who hold existing home loans on a variable rate. Those rates are often pegged against the Base Rate (BR) and Base Lending Rate (BLR) recommended by Bank Negara Malaysia.

Without diving into the complicated details of the BR and BLR itself, it’s important to understand that a reduction or hike in the OPR also leads to a reduction or hike in the BR and BLR set by banks.

Changes in the OPR can significantly impact the average interest rates on both variable and fixed-rate home loans. That means the recent changes by BNM to the OPR may have an effect on interest rates charged on variable home loans. But don’t worry, not all monetary policy is designed to make things more expensive!

Although the OPR has increased recently, it is still manageable for buyers or people looking to access new home loans. The highest rate ever recorded was back in 2008 where the OPR was 3.5%! Taking that into consideration, interested buyers will still be able to enter into an initial agreement at a lower interest rate. It might not be the lowest now, but it’s still pretty decent.

Variable loans will adjust more rapidly than fixed-rate loans, and realistically, a long period of lower interest rates is often required before any significant shifts in fixed-rate loan rates are realised.

So if you’re looking for a variable loan, you’re onto a winner. If you’re holding out for a fixed-rate loan… it’ll take a lot longer for changes to establish in the system. Sorry fixed raters.

What does all that mean overall? It’s a broadly positive move for those of you searching for affordable home loan interest rates.

Should I Buy A Home When the OPR Falls?

To say that the OPR rate falling is good for buying a house is TOO simple a conclusion to make. It’s certainly true that the affordability of financing enjoys some positive benefits from these falling rates.

If your home loan is cheaper, you’ve got more opportunity to find (and afford) the right home for you.

But remember that OPR rates are variable, and have changed several times in the past few years.

You can’t bank your entire home loan amount on the current rates, and you should always think of the future when making a major financial decision like purchasing a property (or a ticket to Rihanna).

Remember also that the reason OPR rates change is because of various economic factors.

What it all means is that many complex factors impact your property decision, from when to buy to how to finance your purchase.

Pros And Cons Of Falling OPR on Economic Activity in Malaysia

Everyone loves a simple roundup of complicated situations, so let’s give you something to chew on!

If in doubt, speak to the home loan advisors at your bank, or contract the services of a qualified and licensed independent financial advisor who can help guide you through your financial planning needs.

When it comes to purchasing property, the more you know, the better equipped you are to find the right deal for you!

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