Last week, Bank Negara Malaysia (BNM) announced another hike in interest rate, or the OPR (Overnight Policy Rate) by 25-basis point, to 2.75%. OPR is the benchmark for commercial lending and deposits rate. Financial institutions use this as guide to set the rates they charged for lending and the interest rate to pay depositors who keep money in their banks. When interest rate rises, money become more expensive.
How does it affect us?
Banks would raise their Base Lending Rate (BLR) and Base Financing Rate (BFR) in tandem with the hike in OPR, and these are how that will affect us (financially).
- Monthly instalments will increase. If we have loans on variable or floating interest rate policy, our monthly payment will rise.
- Borrowing money would be more expensive. We may have to pay more for housing loans, personal loans, credit cards etc.
- Saving and fixed deposits rate would increase. This is the “good” part. If we have money in fixed deposits account, we will enjoy more interests.
Interest rate and inflation
Costs of living are increasing, why do BNM still make money more expensive?
Many external and internal factors can bring about inflation in a country. Generally, inflation happens because there is more demand than supply. The recent inflationary trend worldwide is the consequence of disruption of supply chain due to the pandemic and excessive stimulus packages by governments, especially in the developed countries during the pandemic. Excessive stimulus packages have resulted in people having more money to spend. The war in Ukraine is also causing inflationary pressure in food prices because Ukraine and Russia are both a major agricultural products exporter.
If inflation is not reined in, it would have a detrimental effect to the economy in the long term. Fighting inflation with interest rate is a standard monetary policy in modern economics. Monetary policy is the management of money supply in the market. By making money more expensive, it would reduce spending and control inflation. Hence, we are noticing a trend in governments worldwide raising interest rate to control and bring down inflation. Malaysia is one of them.
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(Information for the article are sourced from www.investopedia.com and www.loanstreet.com.my)
