Keeping the OPR too low for too long could bring more harm than good to the economy, says economist 

by ASILA JALIL / Pic by BERNAMA

THE anticipated increase in the Overnight Policy Rate (OPR) this year will drive interest into banking stocks. 

Economists opined Bank Negara Malaysia (BNM) is inclined to raise the OPR in light of the positive indicators in the domestic economy. 

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (picture) told The Malaysian Reserve (TMR) that keeping the OPR too low for too long could bring more harm than good to the economy. 

“This is especially true when lower rates could incentivise excessive risk-taking in search for a higher-yielding investment vehicle,” he said. 

Higher OPR would translate to the expansion of the banks’ net interest margin (NIM) due to the timing difference in resetting the financing rate and deposit rate, added Mohd Afzanizam. 

He said the financing rate, especially financing contracts with various features such as house and personal loans, will be adjusted immediately when the policy rate is increased while the fixed deposit rate will take some to reset higher as it has to wait for its maturity period. 

“This would expand the NIM albeit momentarily. Generally speaking, when the interest rate is rising, it is commonly associated with an improving economy as the level of monetary policy accommodation has been gradually removed. 

“In other words, the economy has required less help because it is able to grow on its own,” he said. 

Banking stocks appear to have gained investor interest since mid-December with shares of Malaysian Banking Bhd, Hong Leong Bank Bhd, Affin Holdings Bhd, CIMB Group Holdings Bhd and Alliance Bank Malaysia Bhd trading at year highs as investors bet the sector will gain from the improving real economy. 

MARC Ratings chief economist Firdaos Rosli said a higher OPR this year is inevitable based on imperatives in the external and domestic economic developments. 

He said Malaysia is currently on a firm recovery path as all states are now in Phase 4 of the National Recovery Plan. 

“MARC Ratings expects the central bank to raise the interest rate in the second half of 2022 (2H22) by 25 basis points (bps) unless the external economic conditions change drastically in the coming months. 

“In any case, OPR hikes will most likely be gradual, unlike aggressive cuts we saw in the early months of the pandemic,” he told TMR. 

With the expected increase in banks’ NIM, Firdaos said it should lead investors into banking counters but it is also subject to the overall domestic economic condition. 

“Whether or not it will lead to higher loan growth is dependent on the overall economic condition as the economy recovers in time. 

“Banks would have to manage the high percentage of loans under relief (ranging from 21%-32% for the larger domestic banks as at end-October) as OPR rises to avoid massive loan defaults,” he added. 

BNM has maintained the benchmark lending rate at 1.75% since July 2020 after it was slashed by 25bps to accommodate the economy that was struggling with the global health crisis. 

The central bank has slashed the OPR four times which totalled 1.25bps since the onset of the Covid19 pandemic in January 2020. 

Mohd Afzanizam added the increase in OPR will have an impact on consumers but it would not be significant. 

“Bank customers who have the financing facility with a variable rate feature will have to pay slightly more in respect to their monthly instalment. But the rise is quite minimal. 

“On the other hand, depositors would be able to enjoy better rates when interest rates are rising,” he said. 

Standard Chartered Bank on Tuesday projected the central bank will raise the OPR by 75bps in 2H22 as economic activity gains traction in 1H22, while HSBC sees the BNM raise the OPR by 50bps in 2H22 as well.