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  • Writer's pictureBait Al-Amanah

OPR pause supports economic growth but does not help ringgit recover

The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00% on the 6th of July 2023. Benedict Weerasena (Research Director of Bait Al Amanah) was interviewed by Free Malaysia Today on this decision. Here is the full transcript of his response:

Maintaining the rate at 3.00% ensures the OPR level remains accommodative and supportive of economic growth, in light of the slightly slower growth momentum and easing inflationary pressures. As evidence, Malaysia's inflation rate maintained a downward trajectory, with headline inflation easing further to 2.8% in May 2023, from 3.3% in April, and 3.4% in March.

With the OPR restored to pre-pandemic levels of 2019, it is essential for BNM to continue to adopt a wait-and-see approach in the next few months, to closely monitor the delayed impact of the earlier hike in May 2023. This is because it usually takes approximately one year for monetary policy to fully impact the economy, considering how households and businesses adjust their behaviours in response to the policy changes.

At 3.00%, BNM will have the policy space needed to reduce the OPR if or when a recession hits in the future, similar to what was done during the pandemic. In other words, this healthy buffer is essential to prepare for the need to stimulate the economy in an increasingly challenging future.

I understand that there were calls for the OPR to be raised to narrow the gap with the Fed rate, especially with the US Federal Reserve showing a higher likelihood of increased rate hikes. However, it is important to remember that the OPR’s impact on the ringgit's performance is highly overestimated. Instead of hiking the OPR as a stop-gap measure with adverse domestic repercussions, structural reforms are necessary to help stabilize the ringgit. This includes focusing on building economic capacity, enhancing competitiveness and pursuing sound, credible and business-friendly economic policies which will increase Malaysia’s investment attractiveness.

For the full article which incorporates views from other Economists as well, refer here.

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