Recently, Bank Negara Malaysia (BNM) has reduced the OPR rate by 25 basis points, from 3% to 2.75%! It is a response towards a poor economy and the lower rate is also to ease difficult financial conditions.
What is OPR (Overnight Interest Rate)?
The OPR is a rate a borrower bank has to pay to a leading bank for the funds borrowed. Most banks would provide as much loan as possible while preserving the statutory reserve requirement (SRR), the minimum cash required by Bank Negara. When the cash withdrawal is more than the cash available in the bank, to maintain SRR, a particular bank will need to borrow cash from other banks, and make an interest rate equals to OPR.
Decreasing the OPR will immediately decrease the cost of borrowing for banks, and thus, will lead to a chain effect on employment, economic growth and inflation. BNM would reduce the OPR if the uncertainties in the global environment could also negatively affect Malaysia’s growth. On the other hand, BNM would increase interest rates to stop inflation if the growth is too strong and on fears that there could be an asset imbalance in the system.
What Does An OPR Increase (or Decrease) Mean To Malaysians?
An increase in OPR would indicate that banks will increase the base lending rate (BLR) and base financing rate (BFR). BLR and BFR are determined by conventional banks and Islamic banks respectively based on the cost of lending to consumers. The increase of OPR will result in a higher interest rate for loans that are tagged to BLR or BFR. For example: Assuming that a loan has a BLR at 6.0%. A 0.3% hike in OPR will then increase BLR from 6.0% to 6.3%.
Therefore, taking on a loan after an increase in OPR will cause Malaysian consumers to bear more loan interest rates. Otherwise, they need to increase their loan tenure if they do not want to increase their current installment payment amount.
Loan interest increasing would also suggest that fixed deposit interests and saving account interests will increase at the same time too. Therefore, an increase in the increase rate will help Malaysians save more if they have substantial savings. On the other hand, a decrease in OPR would see lowered costs for borrowing, but also a decrease in fixed deposit interests and saving account interests.
