By Jessica Wee
Last week, Bank Negara Malaysia (BNM) announced that they have increased the overnight policy rate (OPR) by 25 basis points to 2.00 per cent its third Monetary Policy Committee (MPC) meeting this year.
The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.25 per cent and 1.75 per cent, respectively, BNM said in its Monetary Policy Statement.
The central bank said the sustained reopening of the global economy and the improvement in labour market conditions has continued to support the recovery of economic activity.
How does that impact us, the banks and economy in general?
Let us begin by understanding why and when do governments/ central banks need to raise interest rates. Raising interest rates is an economic policy tool used by governments to combat rising inflation. Inflation is a measure of the rate of rising prices of goods and services in an economy. It happens when prices rise due to increases in production costs, such as raw materials and wages. Conversely, when inflation is falling and economic growth slows, central banks may lower interest rates to stimulate the economy.
Applying this theory to our lives – when the government announces OPR hike, banks will respond by raising its Base Lending Rate (BLR) and Base Financing Rate (BFR) and thus, interest rates for consumers and businesses. BLR is the rate that is determined by conventional banks based on the cost of lending to consumers.
This means it will cost more to buy a home or finance a company in a rising interest rates environment.
With the economy slowing down, consumers have less ability to spend. The government would have achieved its objective. This also keeps the cost of goods stable and curtails inflation.
How does OPR hike affect banks?
It is a positive impact on banks as they would see its Net Interest Margin (NIM) to increase. It is estimated that every 25bps OPR hike would increase the banking sector’s profit forecast by up to 5% for some banks! As banks earnings are set to rise and hence its dividends, it would be prudent to continue collecting fundamentally sound banking stocks for your investment portfolio.
What would happen to your loans?
Your installment payments on loans would rise on the back of the increase in borrowing cost. While this would reduce your cash flows, it should not greatly impact the consumer’s repayment capacity.
What happens to your savings?
You will see the interest rates for your deposits rising in response to the OPR hiking. This will encourage people to save more and hence, play its part in cooling down the economy.