Bank Muamalat chief economist Afzanizam Rashid remains sceptical that increasing the OPR will effectively address the challenges facing the ringgit.
Commenting on deputy finance minister Ahmad Maslan’s recent statement that raising the OPR may no longer be “relevant” with headline inflation falling below 2%, Afzanizam said a higher OPR can result in slower economic growth.
“The decline in the inflation rate to 1.9% in September suggests that past OPR hikes have shown tangible results and therefore, the need to further increase the OPR has become less urgent,” he told FMT Business.
“We are adding more problems since a higher OPR would mean monetary policy could be highly restrictive, which can result in a slower economy,” he said.
As a result, it may limit borrowing and spending by individuals and businesses, potentially causing economic challenges.
Rather than a quick fix of hiking the OPR, Afzanizam said it was important to identify the fundamental problems facing the ringgit and to implement appropriate long-term policies to tackle the issue.
He said fiscal consolidation is the key policy influencing how credit rating agencies (CRAs) assess the country’s creditworthiness.
“If these policies are effectively implemented, it could result in an upgraded credit rating for the nation, which is crucial for Malaysia’s long-term growth prospects,” he said.
“Additionally, initiatives to enhance education, healthcare, and infrastructure should also be prioritised,” he said.
“These measures will make the country more appealing for foreign investments, trade, and tourism. It will ultimately drive increased demand for the ringgit,” Afzanizam added.
Downward pressure on economy
Political analyst Oh Ei Sun concurred that an elevated OPR could exert downward pressure on the economy’s overall performance.
“In theory, under the assumption that all other economic factors such as gross domestic product (GDP), government debt, consumer spending, and business investments remain constant, this approach (raising the OPR) would be effective,” said Oh.
“However, if other essential economic factors continue to falter, the ringgit is likely to persistently face depreciation,” he said.
“This will lead to an ongoing oversupply of the currency in the market and prevent any potential improvement in its exchange rate,” he added.
Bank Negara Malaysia (BNM) surprised observers in May when it decided to raise the OPR by 25 basis points (bps) from 2.75% to 3%, after hitting the pause button at the Monetary Policy Committee’s (MPC) meetings in January and March.
This brought the OPR to its pre-pandemic level of 3%. However, it held the OPR steady following the MPC meeting in July. The committee will hold its sixth and last meeting for the year on Nov 1-2.
BNM is expected to keep the OPR unchanged at 3% despite increasing pressures to tighten further, according to UOB Global Economics & Markets Research.
In a recent note, it explained the rationale behind its call for an unchanged OPR is that another 25bps hike would not be sufficient to close the interest rate gap with US rates and spur market confidence in the ringgit given the current gap at -250bps.