OPR will increase two more times by next year, predicts economist

 

Bank Negara Malaysia’s (BNM) recent decision to raise the overnight policy rate (OPR) may have seen opposition from many, but economists say it is the most effective and efficient method of tackling inflation.

Economist and former executive director of Malaysian Institute of Economic Research (MIER) Zakariah Abdul Rashid said the OPR is expected to increase two more times; once at the end of this year and another time next year.

He predicted the rate could go up as high as 3 percent.

Although this could cause concern for many, Zakariah said the public needs to understand how the OPR can control inflation.

“As a financial instrument, the OPR needs to be increased.

“This action was taken to curb inflation in Malaysia, which not only does not seem to be going down, it is now happening globally,” he said to Malaysiakini.

BNM had decided to raise the OPR by 25 basis points to 2.25 percent after its fourth Monetary Policy Committee (MPC) meeting this year on July 6.

This comes after the central bank earlier raised the OPR by 25 basis points to 2 percent in May.

Alternatives take much longer

Zakariah explained that the increase in the OPR was seen as a step to “tame” the rising Consumer Price Index (CPI) and the depreciation of the Malaysian ringgit.

“Of course, there are alternatives (to raising the OPR), namely through fiscal policies that try to influence government spending and taxation styles, for example, by adding more subsidies and social assistance.

“It can also be done by influencing the production of output and services as well as the overall productivity of the economy.

“These non-monetary measures are not only more difficult but they take a very long time,” he said.

Zakariah added that the increase in the OPR will affect the pricing of loan funds which will, in turn, affect the demand and supply of money.

Such an action, he said, would be more effective and would influence inflation more quickly.

Hold off on buying homes

Mohd Nazari Ismail from Universiti Malaya also agreed with Zakariah on the effectiveness of curbing inflation by increasing the OPR.

Nazari said it is not the right time for young people to buy a house because there are many risks that could add to their burden.

“It should be noted that if everyone has a tendency of going into debt with the bank in order to buy a house, house prices will keep going up.

“Therefore, I suggest young people not to go into debt to buy a house and instead, just rent for now,” he said.

Commenting further, Nazari did not rule out the possibility that there will be more surplus unsold housing units in the future.

Berita Harian Online had previously reported this April that the number of completed but unsold properties up to December 2021 increased by 24.7 percent, compared to the same period the year before.

The amount based on the 2021 Annual Property Market report released by the National Property Information Centre encompasses 36,863 units worth RM22.8 billion.

Nazari said what the rakyat can do to avoid long-term burdens caused by the interest rate would be to minimise their debt.

“In an economic system based on the banking industry as the currency supplier, inflation issues could easily occur if the demand rate in the economy increases and many have a tendency to go into debt with the bank to purchase houses, cars and other purposes.

“The main way to curb inflation is to increase the OPR.

“If the OPR is not raised, inflation will probably worsen and will be to the detriment of all parties as well. The ringgit will also depreciate,” he said. - Mkini