BNM maintains OPR at 1.75% to support growth


BANK Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 1.75%, as the market expected, to support the recovery underway in the economy.

The central bank stated that the domestic economy faces underlying inflation, as measured by core inflation, as economic activity normalises amid the environment of high input costs.

“Nevertheless, core inflation is expected to be modest, with upside risk contained by the continued slack in the economy and labour market.

“The outlook, however, continues to be subject to global commodity price developments amid risks from prolonged supply-related disruptions,” BNM stated in a release yesterday.

It added that Malaysia’s latest high-frequency indicators show economic activity rebounded in the fourth quarter of 2021, in line with the relaxation of containment measures.

“For 2021, growth will be within the projected range of 3%-4%.

“Looking ahead, growth is expected to gain further momentum in 2022. This will be driven by the expansion in global demand and higher private sector expenditure amid improvements in the labour market and continued policy support,” said BNM.

It added that risks to growth remain tilted to the downside which may arise from a weaker-than-expected global growth, a worsening in supply chain disruptions, and the emergence of severe and vaccine-resistant Covid-19 variants of concern.

Headline inflation has averaged 2.3% for the period January-November 2021. According to BNM, for 2022, average headline inflation is likely to remain moderate as the base effect from fuel inflation dissipates.

What does higher OPR mean for the consumer?

Centre for Market Education CEO Dr Carmelo Ferlito said the immediate effect will be a higher cost of existing and new debts which is not timely because the economy needs additional investments to sustain the recovery and rebalance the supply chain while higher rates are going to discourage this.

Ferlito disagrees with the narrative from central banks and governments that the current higher inflation levels is caused by supply side problems such as energy price rises and supply chain difficulties.

“This is wrong, as the current inflation is the result of government overspending and monetary mismanagement, supply side shocks are not enough to generate generalised inflation, however, increased money supply is.

“Furthermore, fiscal and monetary stimuli triggered by the pandemic has created a one-off misallocation of resources as productive factors are now in the wrong place and causing supply chain problems and holding back economic growth. That’s the reason why we may experience some sort of stagflation,” he told The Malaysian Reserve (TMR).

Ferlito said the only way out of this situation is for governments to cut back expenditure immediately to pre-pandemic levels.

Unfortunately, the temptation now for the governments, as spending on the pandemic is cut, is to spend on other things.

He said this would be a big mistake and governments should be planning to balance their fiscal budgets within the next few years.

Central banks, meanwhile, need to slow the growth in money supply and manage monetary demand to grow a little faster than output so as to achieve their respective inflation target (2%).

“The inflation they have already caused needs to work through the system and certainly needs no more fuel from any excessive monetary and fiscal expansions. It would be a mistake for a central bank to try and reverse policy and create a monetary contraction. This would be a case of two mistakes not making things right.

“Finally, central bank needs to more closely align their official repo rate with market rates of interest and then we will begin to see a rebalancing of the economy, stronger, freer markets and accelerating economic growth,” he added.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff expects BNM to raise the OPR throughout 2022 and 2023, but not at a drastic or immediate increase.

Perhaps it will be raised by 25 basis points to 2% but he doesn’t think it will be this quarter.

“Even though the labour market conditions are improving with the number of unemployed dipping below 700,000 and the Consumer Price Index for November 2021 at 3.3%, the overall economic growth is still sluggish and the Omicron variant has forced the limitation of movement within countries and possible lockdowns in the near future.

“Therefore, BNM might not want to stunt the slow growth with a higher OPR at the moment which will not benefit traders and consumers, who will face higher interest rates on their loans. A higher OPR is normally imposed to slow down overheating of the economy but I don’t think our economy is overheating yet.” he told TMR.