Rising risk factors see BNM keep OPR at 1.75%

The current low interest rate environment could lead to issues such as asset price bubbles and high indebtedness 

by NUR HANANI AZMAN / Pic by MUHD AMIN NAHARUL

MAINTAINING the Overnight Policy Rate (OPR) at current levels for too long on the back of a strong economic recovery could pose macroeconomic imbalances, said Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid. 

He said the current low interest rate environment could lead to issues such as asset price bubbles and high indebtedness among businesses and consumers. 

He, however, expects Bank Negara Malaysia (BNM) is likely to wait for more data points that will convince it of the sustainability of the recovery before adjusting the OPR again. 

Thus, any hike in the OPR is likely to take place in the second half of the year. 

“Higher OPR would incentivise savers to keep their money in banks as they could get better returns compared to when the OPR was at an all-time low. So, banks would have the means to deploy the deposits for financing or lending activities. 

“Furthermore, a higher OPR rate could deter the excessive risk-taking attitude given that investors/savers would have an avenue to keep their money in the bank at low risk,” he told The Malaysian Reserve (TMR) yesterday. 

BNM maintained the OPR at 1.75% at its second Monetary Policy Committee (MPC) meeting of the year yesterday after evaluating factors including the Russia-Ukraine conflict, which has emerged as a key risk to global economic growth, trade prospects, cost pressures from higher commodity prices and volatile financial markets.

The OPR has been maintained at 1.75% since July 7, 2020.

Mohd Afzanizam said the current global events could affect business and market sentiments, leading to cautious spending. 

“In that respect, it is critical for BNM to ensure the monetary policy remains accommodative to support and facilitate the economic recovery,” he added. 

Centre for Market Education CEO Dr Carmelo Ferlito said the central bank will have to address the circulation of excess money in the system due to record low interest rates since July 2020.

He warned this will primarily require painful spending cuts by the government. “We are in a very complex economic moment. We have inflation, caused by the excess money created during the Covid-19 pandemic. The recovery is further pushing up inflationary tendencies. The war in Ukraine is not going to help.

“At the same time, we cannot tighten monetary policy because of the enormous need for investments to ground the recovery on a solid basis beyond the consumption fuelled by government stimuli and government spending. All in all, I think BNM’s decision on OPR is probably the right one,” he told TMR. 

He warned that the risk of inflation should have been considered before printing money. Ferlito added that between 2014 and 2019, all the monetary aggregates (M1, M2 and M3) grew more or less at the same pace of the GDP (around 5% per year) which helped keep inflation below the target of 2%.

“During 2020 and 2021, GDP in total went down 2.7%, while M3 grew 10.7%, M2 11.02% and M3 almost 28%. It was a case of too much money chasing too few goods,” he said.

In a statement yesterday, the central bank stated the unfolding developments surrounding the military conflict in Ukraine, have emerged as a key risk to global growth and trade prospects, commodity prices and financial market conditions.

The global growth outlook will continue to be affected by developments surrounding Covid-19, risks of prolonged global supply disruptions, and heightened financial market volatility amid adjustments in monetary policy in major economies. 

“Despite the challenging environment, the Malaysian economy expanded by 3.1% in 2021. Looking ahead, the growth recovery will strengthen in 2022, driven by the expansion in global demand and higher private sector expenditure, amid improvements in the labour market and continued targeted policy support,” the central bank stated in its release yesterday. 

It added fiscal and financial measures will continue to provide support to economic activity. 

“Amid the prevailing uncertainties, the stance of monetary policy will continue to be determined by new data and their implications on the overall outlook for domestic inflation and growth,” said BNM.