OPR Increase – How it Affects You
Bank Negara Malaysia (BNM) Monetary Policy Committee raise the overnight policy rate (OPR) by 25 basis points to 3.25% on the 6th of July 2014.
Increasing the interest rate is part of the tools available under the contractionary monetary policy. The objectives for pursuing such a policy are to slow down the inflation rate, prevent property bubble and correct financial imbalance such as high household debt.
How does the latest move by Bank Negara affects the ordinary people on the street and companies? Below are some illustrations.
Impact on Interest Rate
OPR is the rate in which banks borrow from each other. It represents the cost for banks to obtain funds. The increased cost will be pass on to borrowers in the form of higher interest rate.
Impact on Current Borrowers
For home owners who have an outstanding mortgage or borrowers who have an existing variable rate loan, the rise in BLR means that they have to pay higher monthly installment.
Impact on Future Borrowers
For some , higher interest rate may deter borrowing. For others, the loan eligibility may be reduced or their loan application may be rejected.
Impact on Inflation
Inflation happens when too much money chases after too few goods. This, reducing the money supply will reduce inflation. The rise in interest rate is an attempt by Bank Negara to lower the supply of money by making it more expensive to obtain. High interest rate will deter borrowing thus money supply will reduce. However, most economists believe that despite Bank Negara’s effort, prices of goods and services is still expected to rise because of inflationary pressures from the upcoming hike in fuel prices and GST.
Effect On Stock Prices
All things being equal, a rise in interest rate will cause share prices to fall. A rise in interest rate means:
- cost of have gone up and profitability has come down
- less borrowing means less opportunity for growth
- companies relying on export market may see lower sales due to reduced price competitiveness as a result of higher currency valuation that usually occur from a hike in interest rate.
July 11, 2014 / /