Must We Lower the OPR?

Lowering the overnight policy rate (OPR) to 2.75% is premature. If it is pre-emptive to the many uncertainties in both domestic and overseas markets, then we are being presumptuous. There is no definitive agreement with the US on tariffs, and we need to be wary about inflation. 

In such fluid circumstances, literally anything can occur. For example, the initial tariff of 24% which was suspended for 90 days pending negotiations was arbitrarily increased to 25%. It is arguably more effective if all trade and related factors are known ahead of any change in the OPR. 

Source: https://en.wikipedia.org

The impact of OPR changes affects the stock market, which will face increasing downward pressures as foreign capital exits in search of better returns elsewhere. It is entirely plausible to suggest that Malaysia withholds lowering its OPR to take advantage of other markets that are more attractive to foreign capital searching for a new home. This is not speculative, as shown when RM516.6 million in foreign capital flowed out of Malaysian markets in the week following the rate cut. 

Foreign capital flows have a direct effect on local currencies. Any significant outflows, for example, can put downward pressure, and is exacerbated by the uncertainty of how long such outflows will last. The concern is its subsequent ripple effects, chief among them being making imports more expensive. 

Such a consequence would put undue pressure on the country’s trade surplus, which fell to RM759.9 million in May 2025, a fall of 92.3% compared with a year earlier and 85.2% compared with the month before. 

While there are measures available to defend the ringgit, they are limited and unsustainable. These include, for example, the draining of the country’s international reserves, or repatriating profits on overseas investments. 

On face value, the lower rates should be good news for the lending sector. As it stands, Malaysian household debt is already one of the highest in Asean, coming in at RM1.63 trillion, or 84.2% of the country’s gross domestic product (GDP). Recent cost-of-living pressures are anticipated to worsen due to the sales and service tax expansion and the rationalisation of petrol subsidies. 

Credit card debt, meanwhile, has increased significantly to RM4.67 billion, an increase of 24.7% from the year before. Buy now, pay later (BNPL) activities are also increasing, reflecting an increasingly stressful situation for Malaysian households. In addition, savers especially those retired ones are directly impacted with this downward change. 

Preliminary GDP data for the second quarter of 2025 from the Statistics Department also puts growth at 4.5% compared with the second quarter of 2024 – a higher figure than the 4.2% forecast by Bloomberg. Inflation seems low (1.2%) but that’s not the justification for OPR reduction. To stimulate the economy? Not likely, with all the uncertainties looming. Reducing cost of doing business? Again, not really – the impact is small for businesses or consumers.

So, what is the real reason to lower the OPR now? 

Reference:

Why the rush to lower the OPR? Mazli Noor, Letter to the Editor, FMT, 18 July 2025