BNM to continue adjusting OPR gradually in line with the health of economy

KUALA LUMPUR: Bank Negara Malaysia (BNM) made no change in the overnight policy rate in its first monetary policy meeting for 2023, meeting the expectations of some economists and research houses.

It ended its two-day meeting which began on Jan 18, deciding to maintain the overnight policy rate (OPR) at 2.75 per cent to allow it to assess the impact of the cumulative past OPR adjustments, given the lag effects of monetary policy on the economy.

In a frequently asked questions sheet on monetary policy shared in line with the OPR announcement today, the central bank said that it is important to have the right policy at the right time.

"We started adjusting the OPR gradually since the health of the economy has improved. Just like doctors, we must adjust the dosage of our medicine based on the condition of the patient.

"If we keep the OPR too low for too long when the economy is steadily recovering for example, it could cause too much spending and borrowing, which pushes prices up," it said.

To recap, BNM cut the OPR from 3.00 per cent to the lowest level in history, at 1.75 per cent, during the Covid-19 crisis in 2020.

The lower interest rates made loans cheaper to spur spending and it did this to cushion the impact of the pandemic when the economy was not healthy and in recession.

It also said the changes in the OPR affect economic activity and overall price level changes, typically by influencing interest rates in the economy.

The central bank said that when it increase the OPR, higher interest rates on savings and loans would influence people to save more and spend less.

Citing an example, it explained when the demand for goods and services in the economy is more than the supply available, prices will keep rising and people would pay more to buy what they want.

"The higher OPR will help to slow demand down. This brings demand more in line with supply and prices would increase more slowly," it said, adding that the reverse happens when it reduce the OPR. Lower interest rates on loans and savings will get people to save less and spend more.

"This spurs economic activity and avoids a situation of falling price levels due to weak demand, which will hurt the economy."

OPR the monetary policy tool to manage inflation

BNM also said that further normalisation to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications to the domestic inflation and growth outlook.

"The Monetary Policy Committee (MPC) will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth," it said.

Inflation is a measure of how much the overall level of prices of goods and services in the economy has changed over a period of time. One way to do this is by comparing the cost of things today against how much they were a year ago.

Every month, the Department of Statistics Malaysia collects the prices of a basket of over 500 items from around 21,800 retail outlets across the country. They use this basket to compute the Consumer Price Index (CPI).

Inflation is measured by comparing the change in CPI over time.

"It is important to have a low and stable inflation. When inflation is low and stable, it means that changes in the overall level of prices are stable and predictable.

"This is important because if prices keep changing and are hard to predict, it is difficult for households and businesses to plan how much they can spend, save or invest. This will then affect economic activity and growth.

"When price increases go out of control, it hurts your purchasing power. High and volatile inflation affects everyone, but it hurts lower-income households the most and it also makes its harder for businesses, which may face higher costs to produce goods and services, or lower sales if the high prices affect consumers' demand".

Deflation

Nevertheless, it said having a long period where overall prices are falling is not good for the economy either.

This is known as deflation, which is bad when it is due to a collapse in demand.

When this happens, many people lose their jobs and there is more uncertainty and financial stress and as a result, there would be lower investment and spending.

Businesses would have to cut prices to attract consumers, but people would not spend as their finances are uncertain and they wait for prices to come down more.

"Like high inflation, deflation is also harmful to the economy," it stressed.

Why is it important to have sustainable growth?

The bank said economic growth happens when the size of the economy increases over time and the size of an economy is usually measured by the total production of goods and services in the economy. This is also known as the gross domestic product (GDP).

"Sustainable growth is the rate at which the economy can keep growing at a steady pace over a long period. For some, it may appear to be a good idea to raise economic growth today, beyond the sustainable pace.

"This is like sprinting too hard in a marathon. You may pull ahead for a short while, but you will also quickly lose steam and might not even finish the race.

"So, it is more important to have growth that can be maintained without causing other problems. We have seen how growth that is too high or driven by cheap credit can damage the economy badly, such as in countries which faced extremely high inflation," it said.

When this happens, it is the people, including future generations, who will pay the costs and be left poorer. Having sustainable growth helps to temper such a boom and bust cycle.

"So, we balance both short and long-term aims in our policies to make sure growth is sustainable. Sometimes, this means being careful to avoid policies that could deliver high growth today but can cause growth to crash in the future," it emphasised.

How does the MPC set the OPR?

The MPC meets at least six times a year to set monetary policy and when deciding on the OPR, BNM would look at risks to both inflation and growth in Malaysia.

Since the OPR was introduced in 2004, it has adjusted the OPR many times, both upwards and downwards, based on what the economy needs.

The OPR was the highest at 3.50 per cent in April 2006. During that time, the economy was growing steadily, CPI inflation was at 4.6 per cent and a higher OPR was needed to manage the risk of higher prices.

The OPR was the lowest at 1.75 per cent from July 2020 until May 2022 to support the economy during the Covid-19 pandemic.

In tough times, low interest rates make borrowing cheaper and lower the returns on savings. This spurs spending, boosts investments and protects jobs and income in times of crisis.

-- BERNAMA