Why Can’t We Up The OPR?

Bank Negara as expected held steady its overnight policy rate (OPR) at 2.75% at its Monetary Policy Committee meeting on 9 March 2023. Some economists have opined that Bank Negara may increase the OPR by another 25 basis points in the second quarter of 2023 (2Q23) or beyond, to the pre-pandemic rate of 3%.

While the Federal Reserve is focused on bringing down inflation even at the expense of the growth, an OPR increase to 3% will not stifle economic growth in Malaysia. There is a need to keep interest rates above the inflation rate. Past data however has shown that it was not common for the real interest rate to be in the negative territory for two consecutive years.

The country’s headline inflation contracted to 3.7% in January 2023 from 3.8% in December 2022. Core inflation declined to 3.9% in January this year from 4.1% in December last year.

But floods in Johor and other parts of the country will impact core inflation.

While central banks have slowed the pace of tightening, interest-rate increases still loom. Across the world, headline inflation has come off their peaks but core inflation and other key price measures have proved stubborn, prompting authorities including the Federal Reserve to flag the possibility of a return to bigger rate hikes just a month after slowing the pace to a quarter-point. With bank failures they may halt further increases for the moment.

The Monetary Authority of Singapore (MAS), which uses the exchange rate as its main monetary tool, has tightened the policy five times since October 2021 and is due to review settings in April against the backdrop of  inflation and momentum in economic activity after China’s reopening.

The current gap between Fed Fund Rate and OPR may depreciate the ringgit further and raise cost of food imports (of RM60 billion annually). The recent bank failures in the U.S. may, however, halt for a while any Fed fund rate increase. Nevertheless, Malaysian savers continue to suffer low deposit rates which are below inflation while businessmen and exporters gleefully enjoy no change in OPR and a depreciating Ringgit.

References:

Central bank forecast to hold OPR steady, Business, The Star, 6 March 2023

S’pore’s MAS chief says global rate hike cycle has ‘ways to go’, FMT, 9 March 2023