Why the Overnight Policy Rate affects Malaysians’ pockets

The Overnight Policy Rate (OPR) is the overnight interest rate set by Bank Negara Malaysia (BNM). The rate can and does change over time, often as a tool used by central banks to shape the economic narrative.

Reducing the OPR will reduce the cost of borrowing for banks and will lead to a chain effect affecting both companies and individuals. OPR changes by central banks are watched closely by many especially for major economies like the United States.

The US Federal Reserve’s (Fed) moves are watched and anticipated for potential changes and even the words used are analysed and help shape the narrative on whether the central bank is dovish or hawkish.

Hawkish means likely to tighten economic policy, raise rates, and prevent the economy from overheating. Dovish means likely to accommodate monetary policy, reduce rates, and stimulate the economy.

In Malaysia, BNM’s Monetary Policy Committee (MPC) decided to reduce the OPR to 3% on 7 May 2019. It is the first cut since July 2016 and BNM is the first in South East Asia to do so.

The ceiling and floor rates for Malaysia’s OPR are correspondingly reduced to 3.25% and 2.75% respectively. Maybank was the first to correspondingly lower their rates with the Base Rate (BR) lowered from 3.25% to 3.05% and Base Lending Rate (BLR) from 6.90% to 6.70%.

OPR cut’s effect on economy and business

Economy: The rate cut’s intention is to boost spending, reduce deflation with a corresponding reduction in the price of goods and to boost the overall Malaysian economy.

Business: Generally positive as most businesses will fare better with lower borrowing costs and increased domestic consumer spending. Sectors that will benefit include property, construction, discretionary goods, and exporters.

The exception: This would be banks and importers who will need to pay more to bring in goods purchased with a weaker Ringgit.

Banks: Reduced profitability with lower interest rates and profits reduced. The impact on banks’ net profit is expected to be around -3%.

OPR cut’s effect on individuals

How does this affect the average Malaysian?

Fixed Deposits: Lower returns for fixed deposits that have not been locked-in prior. Funds to be placed in a fixed deposit should have been done before banks revised their rates.

Equities: Generally a boost for equity markets as most companies perform better with lower borrowing costs and increased spending by consumers. The equities market is a leading indicator meaning that its effect will be seen faster than the economy.

Bonds: Generally fixed rate bonds will increase in value as bonds become more attractive when interest rates drop. In short, bonds have an inverse relation with interest rates meaning bond prices go up when rates go down and vice versa.

This affects long-term bonds more than short-term bonds as there is a longer payment duration affected.

Property loans: Variable rate loans including home mortgages interest rate will go down in tandem. Property loan repayments will reduce approximately RM10 monthly for every RM100,000 in loan amount.

Currency: The Ringgit is expected to weaken with the rate cut due to lower yield and capital outflow. Foreign funds may move money out of Malaysia to invest in other countries.

Worries remain for the Ringgit especially on fears it will further decline against the US Dollar.


The rate cut was expected albeit earlier than most predictions. BNM’s intention to “preserve the degree of monetary accommodativeness” and “support a steady growth path” is viewed positively.

The overall boost to the economy, reduced loan payments, and increased consumer spending power may be just what Malaysia needs in the current times of global financial worries.

This article first appeared in mypf.my