Bank Negara Malaysia (BNM) stated any increase to the overnight policy rate (OPR) is not an easy decision.
BNM Governor Tan Sri Nor Shamsiah Mohd Yunus said the central bank was very receptive to the increase in OPR because it could have a less than satisfactory impact on certain groups.
She said a controlled and gradual increase in the OPR was needed to avoid the risk of a surge in the inflation rates due to excessive borrowing and spending that would result in higher prices.
“When compared to the last two years, the closure of the economic sector following the Covid-19 pandemic placed Malaysia’s economy in a rather critical condition similar to a patient in the intensive care unit (ICU).
“At the time, the OPR was reduced to 1.75 per cent which was the lowest for our country.
“When the OPR is reduced, the floating rate for loan payments becomes lower which has aided in easing the burdens of the people during the pandemic period.
“This situation is similar to treating a patient in intense pain who needs a high dose of medicine and several different types of emergency aid. This is similar to the economy,” she said in an statement to a news daily.
Shamsiah said during the crisis, the economy needed a strong support and BNM, as well as other financial industries had taken several drastic measures to reduce the OPR to the lowest in history at 1.7 per cent.
She explained the Malaysian economy was no longer in such a state, now with a growth rate of 8.9 per cent for the second quarter of 2022.
“The economic growth this year was expected to be at least 6 per cent while the job market had improved, 260,000 individuals had been hired since 2021.
“A lower unemployment rate was recorded in July 2022 at 3.7 percent and private sector wages have also increased.
“Purchase and consumption activities are increasing. The highways in our country are congested almost every weekend and car sales statistics are also growing.
“Similar to the previous analogy, when a patient is healing, the dosage of medicine needed should be decreased gradually to avoid affecting their health.
“With the same method, if BNM doesn’t increase the OPR in a controlled and gradual manner, the country will be involved in excess expenditure and loans in the economy leading to price hikes.
“If this happens, the people will be affected especially those in the lower income groups,” she explained.
She said at its current level, the OPR remained accommodative and would continue to support sustainable economic growth and ensure price stability.
“I want to stress that BNM’s role in formulating monetary policy and OPR is in line with global practices where the central bank is the institution responsible for evaluating and formulating monetary policy decisions independently.
“Usually, the central bank would establish its own committee consisting of economists and finance from the central bank and independent parties to ensure the direction of the monetary policy based on an assessment of the latest developments and prospects for economic growth and inflation.
Shamsiah said long-term policy planning was essential to maintain stable prices and sustainable growth.
She said this included the actions that were less well received by the public such as the increase of interest rates.
“A decision like this may be difficult in the short term, but it will aid in avoiding major long-term economic problems such as uncontrolled inflation and financial crisis,” she said.