OPR hikes to reduce property buying tendency

The move is necessary to mitigate inflation, experts say


THE Monetary Policy Committee (MPC) of Bank Negara Malaysia’s decision to increase the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2% is expected to reduce property buying tendencies.

Centre for Market Education CEO Dr Carmelo Ferlito said the first and most visible effect on the life of normal people in regards to OPR hikes will be a higher cost of borrowing, as loans will be more expensive.

Read more: BNM surprises market, raises OPR to 2.0%

He added that this happens at the moment when most people’s lives are already getting more expensive thanks to inflation.

“The property sector specifically, we can say — very synthetically — that the rise in the interest rate is a negative incentive because, to put it simply, it increases the cost of borrowing.

“The extent to which the purchasing behaviour will be affected (mildly or heavily) depends on the buyers’ mood and their general sentiment about the national economy.

“But, in general, we may say that the move is not going to help,” he told The Malaysian Reserve (TMR) in a phone interview yesterday.

Ferlito pointed out that in general, the announcement of OPR hikes came earlier than expected.

Apart from affecting the property market, he said this may also hamper the economic recovery and job opportunities, as many entrepreneurs are still in the wait and see mode.

“Furthermore, we also believe that the rise in the interest rate is very likely to produce an economic contraction.

“If severe or not, it depends on many factors,” he noted.

BNM yesterday announced the increase of the OPR by 25bps to 2% from the record low of 1.75% the central bank held since July 7, 2020.

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.25% and 1.75%, respectively.

According to the central bank, the decision was driven by inflationary pressures arising from the reopening of the global economy and the improvement in labour market conditions.

It said throughout the Covid-19 crisis, OPR was reduced by a cumulative 125bps to a historic low of 1.75% to provide support to the economy.

“The unprecedented conditions that necessitated such actions have since abated. With the domestic growth on a firmer footing, MPC decided to begin reducing the degree of monetary accommodation.

“This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability,” it said in a statement yesterday.

Echoing similar views, Putra Business School Associate Prof Dr Ahmed Razman Abdul Latiff said the increased OPR rates will affect the lending sector as individuals and businesses will slow down on their borrowings.

He said thus, this will reduce the tendency to buy properties as borrowers now had to bear higher costs for their financial commitment.

“This will not only affect the property sector, but all types of sectors depending on their borrowing level as higher OPR rates tend to slow down economic activities,” he told TMR.

Previously, Ahmed Razman predicted that it is likely that BNM will raise the rate in the third quarter this year, especially if the inflation rate starts to rise from April onwards.

Bank Islam Malaysia chief economist Dr Afzanizam Abdul Rashid said judging from the latest statement from the MPC, it appears that BNM is quite comfortable with the prevailing economic growth trajectory.

He said although the central bank continued to acknowledge the downside risks, the excessive monetary policy accommodation would need to be removed.

“Otherwise, it can cause other problems such as an overheating economy, excessive risk-taking as well as a high level of indebtedness among households and businesses,” he told TMR.

Additionally, BNM said the latest Malaysia economic indicators show growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth.

It added that, however, risks to growth remain, which include weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions and adverse developments surrounding Covid-19.