Head of economics and research of Employees Provident Fund (EPF), Afzanizam Abdul Rashid has commented that keeping the overnight policy rate (OPR) too low for too long could result in financial imbalances. This is as the public could be misled into an erroneous perception of the country’s actual state of economy, thereby gearing up to spend more excessively.

Afzanizam stressed that the public has to understand the rationale behind the changes made to the country’s monetary policy stance. “When we experienced a sharp fall in economic activities during Covid-19 in 2020, we saw the OPR brought down from 3% to as low as 1.75% in less than a year. This is simply because the central bank wanted to help the economy. By bringing down the rates, that would mean the cost of goods became cheaper and would stimulate the economy via investment and consumption,” he explained.

With Malaysia’s economy now starting to recover with increased economic activities, Afzanizam said that the OPR, too, should be adjusted accordingly. “OPR of 1.75% does not run really well with the level of economic activities,” he further stated, adding that an ideal rate is very subjective, but 3% to 3.25% seemed reasonable – based on pre-pandemic rates. He also said that should a recession happen, central banks around the world will take the appropriate action to cut rates again.

Additionally, the economist highlighted the fact that the public discourse on OPR hikes tended to be quite unbalanced. Specifically, Malaysians primarily associate a higher OPR with the rising cost of living and higher loan repayment amounts.

“Discussion on OPR had always been one-sided – from the point of view of borrowers. OPR affects everything, not just lending rates, but also deposit rates. What about those who wanted to save their money and seek investments that provide good returns and at the same time, have a reasonable risk tolerance?” Afzanizam elaborated.

Aside from that, Afzanizam also noted that Bank Negara Malaysia (BNM) has been more prudent in managing its monetary policies than the West. “The adjustment has to be very quick, and especially in the case of the US economy, when there are signs of economic overheating. But it is a different case in Malaysia, where BNM’s policy adjustment is gradual,” he said.

BNM’s discretion in managing its monetary policy has also been commended by the International Monetary Fund (IMF), which noted that BNM moved “quite fast” to stem inflation within the country. In turn, this enabled Malaysia to record one of the lowest inflation rates in the world.

Malaysia’s OPR was brought down to an all-time low of 1.75% back in July 2020 to accommodate the impact of Covid-19 on the economy. It was subsequently raised back to its current rate of 2.75% via four consecutive hikes in May, July, September, and November 2022. In the latest Monetary Policy Committee (MPC) meeting in January 2023, it was decided that the OPR will be maintained at 2.75% for now to review its impact.

(Source: Free Malaysia Today)

• TAGS:
• Covid-19 Economy
• Dr Mohd Afzanizam Abdul Rashid
• Employees Provident Fund (EPF)
• EPF
• OPR
• Overnight Policy Rate