What the lower OPR means for the consumer

LETTER | Bank Negara Malaysia recently surprised the markets, by lowering the Overnight Policy Rate (OPR) for the second time in less than six months. The 25 basis point reduction to 2.75% brings the country’s lending reference rate to its lowest in nine years, as the central bank looks to, according to its official statement, “secure the improving growth trajectory amid price stability”.

What does this mean for us, the consumer on the street?

The OPR is determined by Bank Negara Malaysia (BNM) on a variety of factors and serves as a guide for local banks to determine their own lending rates, both to each other and to the consumer. It is used to manage the supply and demand for money in the market and forms the backbone of monetary policy. It is a significant responsibility shouldered by the central bank’s Monetary Policy Committee (MPC).

As a consumer, the lower OPR means you are now able to obtain loans from the bank at a lower rate. This means both a lower repayment amount over the same loan period or the same repayment over a shorter period. Either way, this is the best time for you to look for that new housing or car loan.

The natural trade-off, of course, is that a lower OPR means a lower savings and fixed deposit rate. Consumers, therefore, must re-assess their savings or investment strategy to ensure they still get the most optimal returns.

In terms of currency, the lower OPR makes it less attractive to foreign investors, weakening the ringgit and making Malaysian exports more competitive, as the weaker ringgit means Malaysian goods will be relatively cheaper compared to their competitors worldwide. Hence, the increased exports should therefore increase output and investment in local enterprises, increasing the opportunities for employment for you and me.

On the other hand, the ringgit’s weakening also means that goods from overseas will be more expensive. This can potentially affect the country’s economic growth, as many of Malaysia’s projects designed to spur growth are dependent on imports such as highly sophisticated machinery, construction materials, foreign consultant services etc. 

This slower growth is capable of dampening the earlier mentioned spike in local export activities, the extent of which remains to be seen.

For those planning for trips or vacations overseas, the weaker currency means it might be better to consider alternatives within the country, to maximise your spending power and, by default, contribute to the country’s economic growth.

The same is true for our spending choices, where choosing and buying local alternatives would maximise your potential returns.

From BNM’s perspective, the OPR is an effective tool to manage consumer spending habits. When the country experiences strong economic growth, the central bank will consider higher OPRs to discourage overspending as the latter might lead to increased inflation for the country as a whole. 

The higher lending rates that come with increased OPRs will also mean higher interest rates that attract savings in the banks, discourage indiscriminate borrowing and encourages responsible spending.

Alternatively, when the economy is generally found to be slowing the central bank will then consider lower OPR bands to encourage domestic spending, and help GDP growth. 

This has been used effectively in large economies to spur economic growth, for example in the US, where rates reach 0% with direct liquidity injections conducted through quantitative easing to support the local economy.

Let’s all work towards becoming responsible consumers for our mutual growth and prosperity.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.