BANK Negara Malaysia (BNM) has increased the Overnight Policy Rate (OPR) from 2.75% to 3% after maintaining it unchanged multiple times between November 2022 until April 2023. While BNM’s official statement explained their decision, I find the argument behind this OPR adjustment peculiar. 

In economics, the OPR is often seen as a tool to control inflation. When inflation is high due to increased demand, BNM typically raises the OPR to slow down demand and prevent excessive inflation. However, with BNM’s recent 25 basis points increase in the OPR, I question whether our inflation is indeed considered as high. 

Malaysia’s inflation rate has been decreasing from 4% in November 2022 to 3.4% last month. Compared to countries like South Korea, Indonesia and Singapore, Malaysia’s inflation rate of 3.4% is still lower. 

So, if our inflation is gradually decreasing and not considered high compared to our peers in Asia, why did BNM raise the OPR? This seems contradictory to the conventional economic view. 

Unless BNM adheres to the inflation-targeting approach of maintaining inflation at 2%, any inflation rate above 2% would be considered high, justifying the OPR increase. However, this perspective is also critically argued by prominent economist Prof Dr Jomo Kwame Sundaram, who believes the 2% target is an arbitrary figure. 

We are all aware of the impact of OPR increases on regular customers of financial institutions like ourselves. If we have loans, our monthly payments will increase, reducing our available cash. While not everyone invests in fixed deposits, most people are burdened by debts, so the negative impact of this adjustment is widespread. 

If the reason behind the OPR increase is to compete with the US Federal Reserve (Fed), which has set its interest rate at 5%, to attract investors, will our 3% rate be more attractive compared to the 5% rate? This raises questions. 

After discussing with my MBA groups on economics and finance, I summarised the issue of the OPR from the central bank’s perspective. 

BNM anticipates higher inflation in the future due to stronger consumer demand and increased employment, leading to overall higher spending. To pre-emptively control inflation resulting from the expected rise in demand, BNM has raised the OPR. The goal is to mitigate the potential significant increase in market prices. 

In recent BNM posters addressing “Misconceptions on the OPR”, it is stated that although inflation is moderating, price pressure stemming from demand remains high. Therefore, my question to BNM is: What inflation rate is considered high? — pic Muhd Amin Naharul 

• Muhammad Yasir Tamizi works as corporate strategy manager

• This article first appeared in The Malaysian Reserve weekly print edition