Of OPR and Bank Negara’s ‘ultimate’ fiduciary responsibility to the rakyat

At the point of writing this piece, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has yet to decide on the Overnight Policy Rate (OPR). Speculation is rife that the benchmark interest rate is bound to be raised.

To recapitulate, the OPR is the interest rate set by the central bank of a country, in our case BNM. It is the interest rate at which a bank lends to another bank. While the government determines its fiscal policy through changing its policy on taxation and spending (subsidy), its monetary policy can be effected by changing the OPR and money supply.

Changes in the OPR trigger a chain of events that affect the base lending rate (BLR), short-term interest rates, fixed deposit rate, foreign exchange rates and long-term interest rates. It also will affect the amount of money or money supply and credit.

Banks determine the rest of these rates when the OPR is decided by the BNM as to make their offerings competitive. If the OPR is increased, banks will pass on the cost in the form of a higher base lending rate (BLR) to the consumers. Currently the OPR stands at 3%.

Simply put, using this twin strategy of both the fiscal and monetary policy, a government determines its macroeconomic goals of achieving the required growth rate, full employment and maintaining a steady inflation rate.

The decision to raise or not to raise the OPR is strictly a judgement call by the government of the day. Numerous considerations have to be simultaneously taken and the objective of raising the OPR has to be responsibly determined.

While BNM is arguably among the most conservative central banks in the world, the speculation of a raise has caused much anxiety and conflicting views among investment bankers. The last time BNM raised the OPR was in May 2011.

Contrarian views of an imminent hike are held by Kenanga Investment Bank Berhad and M&A Securities. While most other analysts opined that the OPR would most likely be raised, they differ only on the quantum. The forecast of 25 to 50 basis points (bps) was bandied around, which would see the OPR raising between 3.25 and 3.50%.

By now, readers would have already grasped the idea of why raising the OPR at this juncture would be ostensibly bad for the consumers and the rakyat.

While the argument that the OPR hasn’t been raised for a long time and that it is now due in order to strengthen the ringgit and counter the inflationary pressures might sound valid, the MPC must also take into consideration the unintended consequences.

Arguably, OPR is always a double-aged sword, much as it differentially affects the exporters and importers. This piece is going to conveniently side-step that polemical discussion of the losers and winners in the trading sector.

More importantly, the argument that BNM has to raise OPR as to tackle inflation based on the scenario that growth is too strong is quite flawed. Despite GDP growth to be close to 6% in the first half, Kenanga expects that growth will average around 5.2% in the second half and a full-year of only 5.5%. Increasing the OPR may in fact weaken further the economy that is anticipated to slow down on the back of a weak global demand.

Similarly, raising OPR to tackle the consequences of cheap cost of funding, ie over-gearing or borrowing, may not be necessary. Measures to tackle assets imbalances or property prices could be addressed by reducing the loan-to-value ratio and the debt-to-income ratio.

Using the monetary policy of raising OPR to tackle inflationary pressure that is not actually caused by a “demand-pull” inflation seems to be similarly misplaced. Raising OPR to address “cost-push” inflation is evidently misdirected.

Many wouldn’t disagree that the CPI that touched 3.4% in the last quarter is a direct consequent of the various “rationalisation of subsidy” and the concomitant hike of tariff in utility namely electricity and toll, plus the hike in both fuel prices and sugar.

So would it be right and appropriate for the MPC to raise the OPR?

More critically, on the back of rising costs of living which seem unbearable to the lower-middle income group coupled with a real income that has almost stagnated, would it be fair to further burden the rakyat?

Quoting from financial comparison portal iMoney.my, a mere 0.5% increase in BLR will result in a 14% increase in total interest paid over the loan tenure if one has a floating rate home loan.

A Maybank IB Research report (on March 13, 2014), quoted that a 50bps (basis points) increase in the mortgage rate could lead to a 6.8% jump in monthly instalments based on a lending rate (BLR) minus 2.4% for a 35-year loan.

Granted that impending scenario, this writer would cite the grim picture of bankruptcy as highlighted by the former RAM Holdings chief economist Dr Yeah Kim Leng early in the year. (60 bankruptcies daily in 2013, as compared to 53 people a day in 2012).

He said that the number of bankrupts in Malaysia is expected to rise following the recent price hikes in electricity tariffs and other household goods, as well as the removal of sugar and fuel subsidies.

One wonders whether the MPC should be eagerly pushing for the revision of the OPR to 25 to 50 basis points. With the household debt, standing at 83.5% of GDP, one of the highest in the region, Malaysia’s low-middle income groups are relying heavily on borrowing to purchase homes and cars and for household spending. It is surely an unending agony for them.

The OPR rate hike doesn’t befit a caring government that the premier wants the rakyat to believe in. Going further, with GST in place April next year, the situation will be grimmer. Which way will the MPC decide?

I rest my case. – July 11, 2014.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.