Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus has denied that the increase in the overnight policy rate (OPR) has led to a rise in bankruptcies.
She said there are no figures to support such an allegation, adding that as a matter of fact, on aggregate, households have continued to hold financial assets in excess of debt which have enabled them to manage higher borrowing costs.
“I wish to stress that it is not true that the OPR increase caused a rise in bankruptcies.
“We acknowledge there are pockets of segments and sectors that need help due to their circumstances, and help remains available for those in need.
“With all these conditions, it is timely, necessary and warranted that monetary policy is recalibrated to make sure that we continue to be on a sustainable growth path,” she said when announcing the first quarter (1Q) 2023 Economic Performance at Sasana Kijang today.
BNM at its monetary policy committee (MPC) meeting on May 3, 2023 increased OPR by 25 basis points to 3.00 percent. Accordingly, the ceiling and floor rates of the corridor of the OPR was increased to 3.25 percent and 2.75 percent, respectively.
Meanwhile, at the announcement, Nor Shamsiah made it clear that the decision to increase the OPR was made because the country’s economy has continued to strengthen, the gross domestic product (GDP) has exceeded the pre-pandemic levels, unemployment has fallen and households remained resilient.
She said amid resilient domestic growth prospects, the MPC judged that it was the right time to further normalise the degree of monetary accommodation.
With this decision, the MPC has withdrawn the monetary stimulus intended to address the Covid-19 crisis in promoting economy recovery.
“At the current OPR level of 3.00 percent, the monetary policy stance is slightly accommodative and remains supportive of the economy,” she said.
She also emphasised that while inflation has been moderating, the greater expansion in Malaysia’s economy and firm domestic demand, continue to contribute to price pressures, keeping inflation elevated, which has also been a trend in many countries.
“In some cases, monetary policy was slow to react, resulting in the need for policy interest rates to be raised more quickly and aggressively.
“We certainly do not want to be in that situation. We must be prudent.
“We also want to avoid a situation of keeping interests too low for too long, especially when the economic growth is firm because this could lead to higher inflation in the future and also (there is the) risk of financial imbalances,” said Nor Shamsiah.
Ultimately, she said, the goal of monetary policy is to achieve sustainable economic growth over a longer term.
The governor also corrected the misconception of wanting economic growth to be slower.
Stressing that this is not true, she said the decision (of raising interest rate) would help to ensure that the country continues to grow sustainably.
Meanwhile, Nor Shamsiah said the domestic financial market remains orderly despite concerns that the global economy output could moderate.
In particular, the banking sector stress in major advanced economies has contributed to global bond yields declining further towards the end of the quarter (1Q) amid monetary policy easing expectations in the United States.
She said despite external uncertainties, investors outlook for emerging markets, including Malaysia, has remained broadly intact.
Malaysia’s domestic government bond yields declined during the quarter in line with global bond yield. Following lingering uncertainties, most regional equities markets including the FBM KLCI also declined in the same period.
However, former finance minister Lim Guan Eng has expressed surprise and disappointment over the recent increase in the OPR.
The DAP chairperson questioned the rationale for the increase and said that it would not be good for business confidence.
“One of the key rationales given by those defending Bank Negara Malaysia’s (BNM) surprise increase collapsed when the ringgit depreciated against the US dollar.
“The OPR hike of 0.25 percent was supposed to help boost the strength of the ringgit against the US dollar,” Lim said in a statement today.
However, the Bagan MP pointed out that in less than 10 days, the ringgit has depreciated from RM4.45 to the US dollar on the day of the OPR hike on May 3, to RM4.47 today.
“Clearly the value of the ringgit is not determined by sound economic fundamentals, solid economic performance, growth rates or OPR set by BNM but more a function of interest rate expectations of the US Federal Reserve.
“This is demonstrated during BNM’s two interest rate pauses this year, which did not jeopardise the value of the ringgit but instead appreciated to RM4.24 to the US dollar on Jan 28,” he said.
Lim said this indicated that the ringgit could still strengthen to the January levels when interest rate hikes by the Federal Reserve hits a pause, thereby allowing the performance of key fundamentals of the Malaysian economy to come into play.
He added that the idea of increasing the OPR to contain inflation was also flawed.
“The other acceptable rationale for an OPR hike is to contain inflation.
“However, inflation fell from 3.7 percent in February to 3.4 percent in March, negating the need to raise the OPR when inflation is being reined in.
“The 3.4 percent inflation rate for March is a 34-month low, making the OPR hike so unexpected.”
This sentiment, Lim said, is reflected by most economists, citing a Bloomberg poll of 19 economists which found that 16 expected the OPR to remain unchanged with only three predicting an OPR hike.
“A poll of 25 economists by Reuters found that 21 expected the OPR to be maintained with only four predicting an OPR hike,” he added.