Behind the Overnight Policy Rate (OPR)

Behind the Overnight Policy Rate (OPR)

The Overnight Policy Rate (OPR) is a key interest rate used by the central bank of Malaysia, Bank Negara Malaysia (BNM), to influence the economy’s monetary conditions. This factor affects inflation, economic growth, and the exchange rate.

This article will delve deeper into the factors that influence the Overnight Policy Rate and its impact on the economy.

Definition and explanation of the OPR

The OPR is the interest rate at which Malaysian banks can borrow or lend money to one another on an overnight basis. Banks borrow from the central bank when they need to meet their reserve requirements or short-term liquidity. The rate is the benchmark interest rate used to set other lending rates in the economy, such as the prime and base lending rates.

The central bank uses the OPR to control inflation and support economic growth. Set by BNM’s Monetary Policy Committee (MPC), Overnight Policy Rate is reviewed periodically to ensure consistency with the overall monetary policy stance.

Factors that influence the OPR

Before deciding to raise or lower the OPR, BNM’s MPC will consider many factors, such as:

Inflation rate

BNM may increase the OPR to reduce credit growth and inflation when inflation is high. Conversely, with low inflation, BNM may lower the OPR to stimulate credit growth and economic activity. With higher interest rates, people will reduce borrowing and spending activities that will help lower inflation.

Economic growth 

Strong economic growth can lead to an increase in the OPR, while weak economic growth can lead to a decrease in the OPR. A strong economy typically leads to higher inflation and greater credit demand, which may require a tighter monetary policy.

Monetary policy stance

With its role in promoting financial stability, the central bank will provide suitable conditions for the Malaysian economy. So, if the inflation rate is too high, the Overnight Policy Rate will be increased to help calm the economic heat.

Exchange rate

Changes in the exchange rate can affect the economy’s inflation rate, which can affect the OPR. For example, if the exchange rate depreciates, this can lead to higher inflation, which may require BNM to increase the OPR.

Global economic conditions

Since 2010, Malaysia’s trade-to-GDP ratio has averaged over 130%, making this country among the nations with the most open economies globally. Thus, global economic and foreign investments have been instrumental in GDP growth. If global economic conditions are weak, BNM may need to lower the OPR to stimulate economic activity in Malaysia.

Impacts of changes in the OPR

Changes in the OPR can have several impacts on the economy, including:

Interest rates

The OPR greatly influences loan holders’ interest rates. For example, if the OPR decreases, interest rates on loans and savings accounts will also drop. This situation gives people more opportunities to access a new home loan.

Borrowing and lending

Individuals’ borrowing and lending activities will be affected if the OPR increases, as it may become more expensive for businesses and individuals to borrow money from banks.

Exchange rate

If BNM raises the Overnight Policy Rate, this can lead to an appreciation of the Malaysian Ringgit, making exports less competitive. However, if BNM lowers the OPR, this can lead to a depreciation of the Malaysian Ringgit, making exports more competitive.

The OPR rate has been revised to 2.75% by Bank Negara Malaysia. It is an increase of 0.25% over the September 2022 rate of 2.50%. The increased rate means it costs more to borrow money. The affordability of accessing capital for personal and business purposes decreases since fewer people can afford to pay the interest.

For loan holders, understanding the factors that influence the Overnight Policy Rate will help you find the best deal. Consult the loan specialists at your bank, or hire a qualified and licensed independent financial advisor if you’re unsure.